The spread between the US 10-year bond and 10-year Japanese Government bonds (JGBs) is a key driver of the USDJPY.
The US 10-year is elevated due to US economic strength and the possibility of rates remaining higher for longer. At the same time, JGBs are being held artificially low by Japanese authorities as they enforce yield curve control. The Bank of Japan allows the 10-year yield to fluctuate plus and minus 0.5 percentage points from zero but will purchase 10-year JGBs at 1% through fixed-rate operations.
As result, the US 10-year/JGB spread has expanded in favour of the US 10-year. This has impacted on the USDJPY, which has also moved up in favour of the USD. The correlation coefficient between the spread and the forex pair is a meaningful 91%.
However, Japanese authorities have intervened in the forex market when they deem the JPY as too low. In September, last year, Japan participated in Forex market intervention. Thereafter, Japanese officials carried out three interventions. These interventions occurred due to the dollar's value surpassing 145 yen, prompting the Ministry of Finance (MOF) to act. The MOF's approach entailed acquiring yen to offset this sharp rise, thereby recalibrating the currency pair to around 140 yen.
USDJPY is currently trading around 147.50 which is above the previous levels of intervention. Thus, it comes as no surprise that Japan has verbally intervened. Masato Kanda, Japan's top currency official, today said that "we won't rule out any options if speculative moves persist." Whilst there was an initial effect, the verbal intervention remains unconvincing, with USDJPY maintaining an underlying support.
At current levels there is a real risk of more forceful intervention by Japanese authorities and upside is likely to be limited.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.