Synopsis:

MUFG discusses the limited impact of Japan's verbal intervention on the yen, noting that while it may create temporary caution among market participants, the underlying trends and broader economic factors continue to support a weakening yen. The potential for direct intervention remains, especially if the yen's sell-off pace increases.

Key Points:

1. Verbal Intervention and Market Reaction:

   • Japanese officials' comments have heightened market participants' awareness of the risk of direct intervention should USD/JPY exceed the 160.00 level.
   • The focus appears to be more on the rapidity of the yen's decline rather than a specific level triggering intervention.

2. Current USD/JPY Trend:

   • USD/JPY has been gradually rising throughout the month, making immediate intervention less justifiable.
   • The gradual pace of the yen's weakening trend contrasts with sharp movements that would typically prompt intervention.

3. US Treasury's Monitoring List:

   • The US Treasury's recent decision to add Japan to its monitoring list for foreign exchange practices introduces doubts about imminent intervention.
   • Vice Finance Minister Kanda noted that US counterparts are primarily concerned with transparency, not necessarily opposing Japan's intervention.

4. Market Dynamics and Speculative Positions:

   • Despite narrowing yield spreads between Japan and other countries, the yen continues to weaken.
   • Leveraged funds have increased short yen positions, reaching their highest levels since 2017.

Conclusion:

MUFG anticipates continued pressure on Japan to intervene directly in the FX market due to the yen's persistent weakening trend and the lack of fundamental factors to reverse this trend. While verbal interventions may provide temporary relief, the overall economic and market conditions suggest that the yen will remain under downward pressure, potentially necessitating more concrete actions from Japanese authorities.