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Summary: The Japanese yen continued its decline on Thursday, breaking below levels seen during Japan's first intervention in the foreign exchange market in years, driven by the persistent widening of the U.S.-Japan yield differential. The currency has lost 5% over the past month.

Fundamentals

For the Japanese yen, this year seems to be another challenging one as the forces that have been detrimental to the yen regain their strength. The continuous widening of bond yield differentials between the U.S. and Japan is a primary driving factor. As it stands, in stark contrast to other major central banks, the Bank of Japan has yet to raise interest rates.

Over time, this interest rate differential is likely to spur capital outflows from Japan in search of higher returns abroad, putting downward pressure on the yen. Despite the recent adjustment in the BOJ's yield curve control strategy to allow long-term Japanese yields to rise up to 1%, this has not halted the yen's decline.

Part of the reason is that the BOJ has intervened in the bond market to prevent a rapid rise in yields, and another reason is that foreign yields have risen faster recently, further expanding the yield differential.

The USDJPY fell to a yearly low of 146.59 on Thursday, surpassing levels seen during Japan's intervention in September last year. As U.S. Treasury yields climbed following the release of Federal Reserve meeting minutes indicating policymakers might continue hiking rates to combat inflation, the yen hit an intraday low. While Japanese Finance Minister Shunichi Suzuki said on Tuesday he was watching market trends with a sense of "urgency," investors and government officials seem to consider the pace of volatility more significant than specific levels.

Recent yen depreciation has exceeded levels that prompted Japan's intervention in the foreign exchange market last year, making some investors nervous about buying Japanese stocks. Despite the yen's nine-day continuous decline, reaching a 9-month low of 146.59, the Nikkei 225 index still fell 1.4% on Thursday. While this might not immediately trigger action from authorities, traders remain cautious of verbal intervention. Should government intervention occur, some investors approach the possibility of a sudden yen appreciation with caution. Nevertheless, even if intervention takes place, the overall trend of the yen is not likely to be altered.

Technical Analysis

On Thursday, the USDJPY broke through levels seen during Japan's first intervention in the foreign exchange market in years, reaching a new high of 146.59 in 2023. However, due to retesting key resistance and the potential for significant intervention threats, the price retreated from headwinds.

While the Japanese authorities have only taken verbal actions thus far, investors remain concerned that they might opt to support the yen at any time, prompting them to adjust their positions to avoid being caught off guard.

Despite a pullback from the previous high of 146.59, the daily chart still signals a strong bullish bias. In the absence of intervention by Japan, further gains are possible, opening the path toward the psychological level of 150.00. Initial upside targets include 146.10, 147.00, and 148.05.

Conversely, if the Japanese authorities decide to intervene, there is a substantial downside risk for the asset pair, potentially accelerating toward the psychological support at 140.00.

Taking a broader perspective, the ongoing bearish pressure on the yen due to the persistent widening of bond yield differentials between the U.S. and Japan will eventually test the sensitivities of Japanese authorities. With their usual playbook in mind, various options remain on the table.In terms of trading strategy, the focus remains on buying low and selling high.

Trading Recommendations

Trading Direction: Long

Entry Price: 146.00

Target Price: 148.80

Stop Loss: 144.40

Valid Until: 2023-08-31 23:55:00

Support: 145.87, 145.04, 143.91, 141.96

Resistance: 146.59, 146.97, 148.48, 149.11