USDJPY:
The yen remains near multi-year lows as the interest rate differential continues to encourage positions favoring the dollar. The Bank of Japan must take risks to economic growth and the government bond market into account, limiting expectations of rapid policy tightening. High costs for imported energy are placing additional pressure on the Japanese currency.
On the US side, USD/JPY is supported by resilient employment data and a recovery in US Treasury yields following their recent decline. At the same time, rising geopolitical tensions are increasing demand for the dollar, which combines defensive qualities with higher yields. Softer US inflation has reduced the likelihood of an imminent Federal Reserve rate increase, but the yield differential remains wide.
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The main constraint on further gains in the pair is the risk of action by the Japanese authorities. The Ministry of Finance has again stated that it is prepared to respond to excessive currency movements, while previous interventions show that a sharp rise in the dollar may trigger countermeasures. However, without confirmed action, this risk does not outweigh the interest rate factor, and the baseline scenario allows for a cautious rise in USD/JPY.
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