The USD/JPY pair has been trading in a narrow range around the 145.50 level in the Asian session on Wednesday, as traders are wary of possible intervention by the Bank of Japan (BoJ) to curb the yen’s depreciation. The Japanese currency has weakened to a 9-month low against the US dollar, amid diverging monetary policies and economic outlooks between the two countries.
Japan’s GDP Surprises to the Upside in Q2
According to the preliminary data of the Gross Domestic Product (GDP) figures for the second quarter (Q2) of 2023 released on Tuesday, Japan’s economy grew by 1.5% quarter-on-quarter (QoQ), beating the market expectation of 0.8% and the previous figure of 0.7%. On an annualized basis, the GDP increased by 6.0%, compared to the forecast of 3.1% and the prior reading of 2.7%.
The better-than-expected GDP data was driven by strong domestic demand, especially private consumption and capital expenditure, which offset the negative impact of weak external demand and rising commodity prices. Japan’s Economy Minister Shigeyuki Goto stated that he anticipated a moderate economic recovery, but also warned of the risks of a global slowdown and inflationary pressures. He added that the government would respond flexibly to the economic and price situation as needed.
US Retail Sales Beat Expectations in July
Meanwhile, the US economy also showed signs of resilience, as the retail sales data for July came in above expectations on Tuesday. The headline figure rose by 0.7% month-on-month (MoM), higher than the consensus estimate of 0.4%. Sales excluding the automobile sector increased by 1%, versus the expected 0.4%. The positive retail sales data suggested that consumer spending remained robust despite the surge in COVID-19 cases and the expiration of some stimulus measures.
The US dollar index, which measures the greenback’s strength against a basket of six major currencies, climbed to a four-day high of 103.40, as investors priced in a higher probability of a rate hike by the Federal Reserve (Fed) in the near future. The Fed is expected to announce its decision on tapering its asset purchases at its next meeting in September, and possibly raise its benchmark interest rate by 25 basis points (bps) by the end of the year.
BoJ Intervention Fears Loom Over USD/JPY
The widening gap between the US and Japan’s monetary policies and economic prospects has put downward pressure on the yen, which has lost about 10% of its value against the dollar since the beginning of the year. The USD/JPY pair has risen from around 132 at the start of January to above 145 this week, reaching its highest level since November 2022.
However, traders are cautious about pushing the pair higher, as they fear that the BoJ or Japanese officials may intervene in the foreign exchange market to stem the yen’s slide. The BoJ has intervened several times in the past to prevent excessive volatility and appreciation of its currency, which could hurt its export-oriented economy and hamper its efforts to achieve its 2% inflation target.
In September and October last year, the BoJ sold massive amounts of dollars and bought yen, as the USD/JPY pair approached the 145 level. Japan’s Finance Minister Shunichi Suzuki said on Tuesday that rapid movements in the currency market were “undesirable” and that the government was “ready to respond appropriately”, without specifying any particular levels for intervention.
A recent poll by Reuters showed that Japanese officials could intervene in the currency market if the USD/JPY pair reaches 145 or higher. Moreover, Japan’s top financial diplomat Masato Kanda said this week that authorities were in close contact with US Treasury Secretary Janet Yellen and other overseas officials “almost every day” on currencies and broader financial markets.
Market Participants Await More Data and FOMC Minutes
Market participants will keep an eye on more economic data from both countries, as well as the minutes of the Fed’s latest meeting, which will be released on Thursday. The minutes may provide more clues on the Fed’s tapering plans and rate outlook, which could affect the USD/JPY pair’s direction.
Later in the day, the US will release its building permits, housing starts, and industrial production data for July, which are expected to show mixed results. On Thursday and Friday, Japan will publish its trade balance and national consumer price index for July, respectively, which are likely to reflect its weak external demand and low inflation environment.
