Kevin Zhao, Head of Global Sovereign and Currency Fixed Income at UBS Asset Management, stated that if Japan intervenes again to support the yen, it would offer a favorable opportunity to sell the currency, questioning whether the Bank of Japan's rate hike last Friday signals a shift toward a hawkish stance. When Japanese authorities intervened earlier this year to bolster the yen, he sold the currency and is now waiting for the next action window.
In an interview, he indicated that the BOJ's latest rate increase and its acknowledgment of a policy shift into a "new phase" have failed to convince skeptical investors that the yen has further upside, whether driven by expectations of higher interest rates or speculation about future intervention moves. Zhao remarked, "The fundamental policy of a weak yen has not changed. The dollar-yen rate could continue to climb, after which authorities will intervene again at some point, otherwise they would lose face."
Zhao had previously held an overweight position but sold the yen during the joint intervention by Japan and the U.S. in July to buy the currency. That intervention occurred against the backdrop of the yen falling to a 40-year low of approximately 164 yen against the dollar. Although the yen strengthened earlier this month on market expectations that the BOJ would accelerate tightening, Friday's rate hike provided little support, and the currency has slipped back to near previous levels.
Following the rate decision announcement, Japanese authorities conducted a rate check, a step typically taken before intervening to buy yen. Zhao expressed "significant skepticism" about whether the BOJ's monetary tightening can sustainably push the yen higher, given that U.S. interest rates may maintain the yield differential between the two countries. While traders anticipate the BOJ could raise rates three more times by June, they also expect the Federal Reserve to cut rates an equal number of times during the same period.
"If the dollar-yen rate did not fall when the Fed cut rates, then why would it drop sharply when the Fed hikes?" he said. Zhao believes that despite rising inflation driven by Japan's economic growth, the BOJ will continue to delay monetary tightening in the coming months. Takaichi Sanae remains determined to press on with increased spending to support the economy, aligning with former Prime Minister Shinzo Abe's "Abenomics" policies.
Zhao noted, "Both the prime minister and the BOJ are comfortable maintaining the status quo. Stock markets are sharply higher, nominal GDP is growing, and given the massive debt burden, low interest rates are favorable. Abenomics does not equate to a stronger yen."
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