The USD/JPY initially dipped during the trading session on Tuesday but found buyers again below the ¥149 level as the US dollar is like a wrecking ball against almost everything. Because of this, I think it’s probably only a matter of time before we reach the psychologically important ¥150 level, and now everybody is holding their collective breath to see whether or not the Bank of Japan comes in and intervenes again.
I do think they will eventually, but at this point in time it should be obvious that they cannot turn the tide of the trend. The only thing they can do is perhaps slow things down. However, it was just a couple of weeks ago that the Bank of Japan drove this exchange rate almost 900 points below where we find ourselves at right now. Short-term pullback should continue to offer plenty of buying opportunities, and at this point the 50-Day EMA is sitting near the ¥143 level and is rising.
If and when we break above the ¥150 level, it’s likely that we continue to go much higher, and I think this trend simply will continue in the same direction until the Bank of Japan changes its attitude. Currently, the Bank of Japan is buying unlimited bonds in order to keep interest rates down to 0.25% on the 10 year bond. Ultimately, this is something that is going to be difficult to do forever, but at the same time Japan does not have the demographics of pay back this type of debt. Something nasty is going to happen in Japan very soon, and at this point I just can’t imagine a good way out.
They will either continue to buy unlimited bonds, meaning that the value of the yen is going to get decimated. They spent 15% of their FX reserves during the last interaction, which lasted all of about 7 days. In other words, they will be able to do this too many times before really starting to worry. On the other hand, they could let bond rates rise, and you will see the Japanese yen strengthened quite drastically, but at the same time you are going to see rates in Japan skyrocket. Unfortunately for the Bank of Japan, there just is no good solution going forward.
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