Synopsis:

Japan's Ministry of Finance (MoF) may have changed its FX intervention strategy, with recent actions suggesting intervention to boost the yen. This follows a significant drop in USD/JPY after the soft US CPI print, amid high JPY futures volumes. Although unconfirmed, internal reports indicate possible MoF intervention, aiming to leverage a USD-negative event for more effective results.

Key Points:

• USD/JPY Movement: USD/JPY dropped around 2% following the soft US CPI print, significantly more than other USD crosses. This unusual drop hints at possible MoF intervention.
• Market Speculation: Japan’s top currency official, Masato Kanda, has not confirmed intervention, but reports citing internal sources suggest otherwise. Additionally, a "rate check" with traders was reported.
• Strategic Shift: Previously, the MoF intervened ahead of a Fed meeting in April, but the recent intervention appears to capitalize on a USD-negative market event to boost the yen more discreetly and effectively.
• Effectiveness: This new strategy could achieve better JPY gains by unwinding more JPY shorts in a short period, making the intervention less noticeable and more impactful.
• US CPI Impact: The soft US CPI print was positive for the yen, suggesting a narrowing USD rate gap, potentially driving USD/JPY lower.
• BoJ Considerations: FX intervention reduces the likelihood of the Bank of Japan hiking rates in July to support the yen. However, a sustainable downtrend in USD/JPY may take time, given the persistence of speculative, carry-driven JPY selling.

Conclusion:

ING suggests that the MoF's recent actions point to a strategic shift in FX intervention, aiming for more effective yen support by leveraging USD-negative events. While this strategy may achieve short-term JPY gains, a sustainable downtrend in USD/JPY will depend on broader market dynamics and speculative behavior.