The latest data shows that the 10-year JGB yield has been steadily climbing to 1%, accompanied by the 3-month and 6-month OIS rates in Japan ranging from 0.12% to 0.17%. Surprisingly, despite these bullish movements in JGB yields and OIS rates, the JPY has failed to strengthen. The main culprits for this short-term weakness in JPY seem to be the broad-based US dollar strength and the deceleration in the lagging core-core CPI inflation trend.
It is imperative to keep an eye on the key short-term support level of 155.90 on the USD/JPY pair. The price actions of USD/JPY have managed to stay above its 20-day moving average, serving as a support at 155.90. Even with the rise in both the 10-year and 30-year Japanese Government Bonds (JGB) yields to 1% and 2.17% respectively, the USD/JPY pair has held its ground. JGB yields and overnight index swap rates are hinting at a potential rate hike by the Bank of Japan (BoJ) in July.
One of the major reasons for the yen’s inability to stage a short-term bullish reversal is the deceleration of the consumer inflationary trend in Japan. Inflation data plays a crucial role in influencing the BoJ’s decision to normalize its monetary policy. Governor Ueda of BoJ has emphasized the importance of sustained, stable achievement of the 2% inflation target along with robust wage growth for initiating an interest rate hike cycle. While Japan’s producer prices have started to show signs of improvement, the core-core CPI, a key gauge of inflation trends, continues to decelerate.
US Dollar Strength
The US dollar has been gaining momentum against major currencies, driven by the recovery in US Treasury yields. The 10-year yield is inching closer to a significant technical level of 4.50%, having rallied by 16 basis points recently. On a 5-day rolling performance basis, the JPY ranks as the third weakest major currency against the US dollar. The USD/JPY pair has recorded a gain of +0.8%, outperforming the US Dollar Index.
The recent market trends in Japan reflect a complex interplay of factors such as rising government bond yields, overnight swap rates, inflation trends, and US dollar strength. The failure of the yen to strengthen despite favorable movements in JGB yields underscores the broader challenges facing the Japanese economy. As investors navigate these uncertain waters, staying vigilant and informed about the evolving market dynamics will be crucial for making sound investment decisions.