USD/JPY Tests 130.00 As New BoJ Governor Rumors Swirls
USD/JPY Tests 130.00 as New BoJ Governor Rumors Swirl
The yen is back on the rise again, with USD/JPY testing 130.00 as news breaks that Japan may be nominating Kazuo Ueda as its next Bank of Japan (BoJ) governor. A former BoJ policy member, Ueda will replace Haruhiko Kuroda who is stepping down in April.
Ueda is a well-known academic who was closely involved with the BoJ’s ultra-easy monetary policy. He has been seen as a strong candidate to take over from the current governor Kuroda, who is expected to retire on April 8.
Assuming Ueda is nominated as BoJ Governor, markets will be looking to see what his policy will be. The new governor will have to decide whether to continue with the current policy or make changes that might be more hawkish, which would boost the yen.
The real yen exchange rate is still very low by historical standards, but it has been gaining ground since the BOJ widening its YCC yield target last December. According to our Behavioural Equilibrium Exchange Model, the real medium-term overvaluation of the USD/JPY is around 9-10% – which is slightly below our long-term average, but well within the range that has normally led to convergence to fair value in the past.
Inflation is still high in Japan, with core inflation rising 6.5% year-on-year in December. It is likely that the BOJ will continue its policy of containing the yen exchange rate, which will keep pressure on the dollar as the Japanese government seeks to boost inflation.
USD/JPY is currently trapped between 130-133, with battle lines being drawn ahead of leadership nominations expected next week and US CPI data Tuesday. It has also been supported by recent risk-off sentiment in equities, which has seen the JPY benefiting from a strong US dollar as investors seek to avoid the higher rates of equities and the potential of a Fed pivot.
Despite all of the recent volatility in currencies, we are unlikely to see a yen intervention any time soon – as a result of communication challenges and the G20 protocol. However, if yen weakness were to become a major issue for the Japanese government and it was affecting their trade balance negatively, they could consider some form of FX intervention.