USD/JPY finally breached 158 to the upside last week, closing at 158.74. There was no strong evidence of MOF’s interventions around 158. We believe market interventions can only delay the inevitable as FX fundamentals have not yet tilted toward USD/JPY downside because: 1) Oil remains elevated, leading to the rise in USD. 2) There are no strong signs of Japanese investors’ repatriation. 3) Japanese fiscal policy uncertainty increases, owing to news reports on the supplementary budget. Bessent might not want any UST redemptions from MoF in the current rising US bond yield environemnt, hence the support for JPY intervention. But crude remains elevated with brent closing 109+ last week. We estimate a potential maximum impact of JPY 6trn deterioration in Japan's trade deficit if Brent remains around 105-110. This amounts to a 5-6% depreciation in JPY. Even on capital flows, while equity inflows remains strong, bond outflows continue to remain elevated resulting in a net neutral picture on flows. JGB yields continue to soar with 30yr JGB above 4% (first since 1999) finding no love from local lifers. While we see June hike as very likely, the bar for BOJ to outhawk current market pricing is very high. For e.g. the 2yr forward 1yr swap rate which can be viewed as one proxy for the terminal rate — has already risen above 2%. This is above the midpoint of the BOJ's estimated neutral rate range in nominal terms, and depending on the estimate used, is already in restrictive territory. But it is unlikely that hiking to such levels represents the consensus view among BOJ Policy Board members. Furthermore, market skepticism regarding coordination between the government and the BOJ is likely to persist, which will likely weigh on the JPY. In summary, we believe JPY might remain headed towards 162. Any intervention is unlikely to make it rise above 156 levels. To break above 162, JPY needs 10yr UST around 4.85 & Brent above 120. On the upside 156 is the level below which JPY can sustain only if BOJ turns distinctly hawkish or Brent falls below 90. But with DXY finding strength last week, we expect a retest of 162 before 156.
