The Japanese yen is crashing

USD/JPY just rose to highs not seen in over a decade. What is happening to the Japanese yen, and where are things going from here?

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BOJ unscheduled intervention

The currency pair jumped after the BOJ offered twice to buy an unlimited amount of government bonds in an effort to keep bond yields from rising beyond 0.25%. That is the ceiling the BOJ has placed on 10-year JGBs (Japanese Government Bonds) as part of its yield-curve control program.

Why does this matter for the JPY? While bond yields around the world, including in the US are rising, the Japanese central bank is intervening to keep yields low in Japan. As a currency carry trader, you want to borrow from (sell) the low yielding currency in order to invest in (buy) the high yield currency. Hence the yen getting sold against most major currencies.

What happened

The first time the BOJ offered to buy, it didn't stop the rise in yields, which is why the central bank had to come to the market again a few hours later. The ‘double move’ shows the commitment to keep the yield curve control policy in place, effectively affirming the dovish stance of the BOJ.

Adding to the barrage of classic ‘jawboning’ (where officials discuss a currency with the purpose of affecting exchange rates), former currency diplomat Sakakibara stated that a weak yen would be good for the economy. The argument is that a weaker yen would help exporters and provide a boost to inflation, a chronic headache for the BOJ.

Sakakibara, although a former BOJ official, still has a lot of influence given his experience. Traders interpreted it as a "green light" for the USDJPY to move higher.

Where things are going

The last time there was such a dramatic move and the currency was in this territory was back in 1997, when the pair was at 125. It broke the level and practically jumped straight towards 150; with the exchange rate not coming under control until after the Federal Reserve was forced to intervene weeks later.

The yen is being driven almost entirely by the differential in interest rates, with the Fed expected to aggressively hike over the coming months while the BOJ is expected to remain dovish. If the BOJ agrees with Sakakibara, it might allow further depreciation and the pair could move higher as the Fed hikes rates.

For the USD/JPY trend to change, the BOJ or the Fed will need to change tact – or the yen will need to be driven by other factors. The most prominent of those is probably haven flows. Should market sentiment deteriorate, traders could look to buy a discounted yen as a haven currency.

The USD/JPY Rocket

The price has returned to significant resistance at the 125 level as part of an accelerating short term uptrend that has been in place since the break of a downtrend line last year.

The short term trend is overbought and has seen some profit-taking at the long-term 125 resistance. However strong momentum would suggest the level gets taken out, moving the focus to 130 and beyond.

Key Takeaways

Monetary policy in Japan continues to diverge and Japanese officials seem content with a weaker yen. This implies the uptrend continues.

If the depreciation of the yen becomes ‘disorderly’ then the BOJ could change tact and turn more hawkish. Nearer term yen strength could also be brought about by increased haven flows.