USD/JPY hits yearly high: will the Bank of Japan intervene this time?

The Japanese Yen has once again entered a steep decline since July. The USD/JPY reached a new 2023 high of 147.8 this week. The Bank of Japan previously had intervened at this level and bought the exchange rate back below 140. Will the BOJ make the same move this time?

Bank of Japan’s messages

In late August, the Governor of the Bank of Japan reiterated during the Jackson Hole Global Central Bank Economic Symposium that the bank still considers the current "underlying inflation level" to be below its alert threshold. However, not long ago, the Bank of Japan also hinted at a subtle shift in its stance by suggesting a more “flexible” yield curve control (YCC).

However, there appears to be a slight easing in the recent comments made by Bank of Japan officials. The central bank's board member Junko Nakagawa emphasized on September 7th Thursday that, it is necessary to sustain the ultra-loose monetary policy for now, but she also noted a growing trend among Japanese companies to raise both prices and wages, suggesting a possibility of long-term inflation may surpass initial expectations.

In a unique stance among central banks, the Bank of Japan, which has wrestled with deflation for decades, actually welcomes inflation with open arms. Even as Japan's inflation rate has stayed beyond the BOJ's 2% target for 16 consecutive months, the Japanese central bank remains watchful, concerned that this might just be a be a transient phenomenon.

Will BOJ intervene if JPY continues to depreciate?

Drawing from recent cues emanating from the Bank of Japan, coupled with Japan's unexpectedly robust economic performance this year and prevailing inflation rates, it appears that the idea of adjusting its monetary policy has seeped into the Bank of Japan's considerations. However, given the Bank's inherent caution, anticipating a rapid and dramatic transformation in the near future would be unrealistic.

One possibility is that the Bank of Japan may make minor adjustments to its Yield Curve Control (YCC) at the September meeting, possibly following a similar approach to what it did in December 2022 when it raised the upper limit of the yield curve control or emphasized its intention to further relax the YCC.

Furthermore, the Bank of Japan might find itself compelled to intervene in support of the Japanese yen even before the next scheduled meeting. The USD/JPY exchange rate is apparently approaching a critical juncture in the weeks ahead, with the release of U.S. inflation data next week and the September FOMC meeting looming on the horizon. These events could potentially further boost the US dollar's momentum, increasing the risk of the yen declining to a 33-year low.

USD/JPY technical analysis

From a technical standpoint, looking at the daily chart, the USD/JPY has decisively breached the 146 level and is steadily ascending towards last November's high at 148.84 now. This level is poised to become a significant test for the USD/JPY before it takes aim at the key psychological barrier of 150.

On the flip side, if the attempt to break through this resistance falters, there is immediate support around the 147 level, corresponding to the previous high in August. Further downward movement could find favorable support in the form of the uptrend line that has been in place since July. As long as this trendline remains intact, the bullish momentum for USD/JPY should remain valid.