USD/JPY: beware of an unexpected trigger
As we already know, the Bank of Japan decided not to adopt additional easing at its last policy meeting. It managed to dodge from its proverbial interest rate cuts this time. Citi believes that BoJ by not doing so passed the policy baton to the Ministry of Finance. If USD/JPY breaks 100, the MoF will have to intervene.
Of course, the Japanese government will try to avoid doing so ahead of the US presidential elections striving not to deteriorate the US-Japan relations. But December visit by Russian President V. Putin and expected improvement in Japan-Russian relations (dispute over Kuril Islands is a main hurdle that weighted on the relations between two countries) make Shinzo Abe fearless. If two leaders manage to negotiate this issue, it may result in the Yen’s appreciation.
A fall of the pair to 95 will result in the increase of the demand for hedging the past foreign investments by Japanese investors, this, in turn, will cause a further USD/JPY drop. The monetary authorities will unlikely accept such JPY strengthening. Therefore, they will have to intervene.