Japanese Yen: Energy shock and Japan policy risks – MUFG

MUFG’s Lee Hardman notes USD/JPY is holding just below year-to-date highs as a negative energy price shock weighs on the Japanese Yen. Rising Brent prices linked to US–Iran tensions and Houthi threats to shipping highlight global supply risks. At the same time, Japan’s newly approved economic and fiscal plan and large investment strategy shape expectations for future BoJ policy and Yen performance.

Yen pressured by energy and policy

"The major foreign exchange rates have been largely unchanged overnight with USD/JPY continuing to trade close to year-to-date highs just below the 163.00-level. The negative energy price shock remains a headwind for yen performance. Only the Swedish krona and Swiss franc have weakened more than the yen since the US-Iran conflict started back in late February."

"At the same time, the Japanese government finally approved an annual economic and fiscal policy plan. The approved plan didn’t include a decision on Prime Minister Takaichi’s election pledge to suspend the sales tax on food. The government will determine its policy by early August."

"Along with the fiscal plan, the government also approved the latest version of the country’s growth strategy including the key pillar calling for domestic investment of more than JPY370 trillion through to March 2041 with the aim to lift nominal GDP to nearly JPY1,100 trillion."

"The final document also included a footnote stating that the government leaves specific monetary policy tools up to the BoJ while respecting its autonomy. It stated “it is very important to conduct appropriate monetary policy in a manner that contributes to ‘stable price increases’”. The addition has helped to ease some concern amongst investors that the government will restrict the BoJ’s room to tighten policy further which had encouraged yen selling."