Will the BoJ warn investors the yen is not so safe?

Please see below the latest ‘Chart of the Week’ from State Street Global Markets


This week Michael Metcalfe, global head of macro strategy at State Street Global Markets. discusses why the Bank of Japan (BOJ) needs to act sooner rather than later in the face of rising deflation risks and yen strength.

“Even after its recent surge, the yen does not meet the usual criteria to warrant intervention, if such a thing exits.  Inflation was already showing signs of flat lining before Covid-19 hit the domestic economy, revealing that deflation risks were rising. That looks increasingly likely now and, as the chart below demonstrates, this risk will be compounded in the near-term by the strength of the yen. Whilst the yen is still undervalued against the US dollar and shows little evidence of being a one-way market or ‘over-owned’, it has potential to overshoot much further. It is this combination of precarious inflation/deflation and the potential for a yen overshoot that will provide the rationale for Japanese authorities to intervene sooner rather than later.”

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