The MOF’s intervention policy is dangerous
The window in which the BoJ could have initiated a monetary policy turnaround is slowly closing. The headline inflation rate is falling and the core rate has at least reached a plateau. If the BoJ did not tighten its monetary policy when inflation kept rising, now is hardly the time to raise its inflation forecast and end its expansionary monetary policy.
At the same time, however, the Ministry of Finance’s (MOF) threat of intervention prevents too significant a depreciation. But this strategy is dangerous. If the MOF fails to draw a ‘line in the sand’ that is perceptible to the market, the intervention efforts could be deemed to have failed, which would increase the devaluation pressure all the more.
Without this risk scenario, the ‘only’ remaining JPY-supportive argument is that the other major G7 central banks have allowed their rate hike cycles to expire and some (notably the Fed) will initiate a rate cut cycle next year, as we suspect. Then, the Yen’s interest rate disadvantage should shrink (at least in expectation), leading to a moderate Yen recovery.
Source: Commerzbank Research