Tokyo FX comments unlikely to have much impact

JPY: Jawboning will require policy action

The USD/JPY rate hit a new high in early Tokyo trading today, at 153.27 before then retracing back lower helped in part by comments from Finance Minister Kato who stated that he was seeing “one-sided and rapid moves” in the foreign exchange market and that the government would “carefully examine any excessive or disorderly moves in the market”. That followed comments yesterday from probable new PM Takaichi who stated that she had no intention of attempting to lower the yen further and also added that it was not for her to comment on BoJ policy, giving the impression that BoJ policy decisions would be left to the BoJ. But at this stage these comments are unlikely to provide much support. A possible discussion on updating the formal cooperation agreement between the government and the BoJ, signed in 2013 under PM Abe and Governor Kuroda, has created uncertainty over near-term policy direction.

In any case, we are some distance from any prospect of intervention and market participants will therefore see little threat from these comments. Furthermore, the initial most important step that may help stem yen selling is reaching an agreement to form a stable working majority in the Diet. The bedrock of that is the long-established New Komeito-LDP coalition that is currently under threat. New Komeito leader Tetsuo Saito and Sanae Takaichi met this afternoon and Saito reportedly repeated the demand for the LDP to tighten further the controls in regard to political party funding and to reveal more details on the LDP slush fund scandal. Takaichi and the LDP is currently opposed to some of the New Komeito demands arguing the measures would not improve transparency over party funding. But in a television interview last night Takaichi stated that a new coalition agreement can still be reached. If a new deal is confirmed we may see some modest rebound of the yen given perhaps the latter period of yen selling has been more a reflection of political instability rather than the Takaichi victory specifically.

But a failure to reach a deal, which is now being reported on NHK, would leave the LDP needing to either govern as a minority government alone or trying to reach an informal deal with New Komeito and say the Democratic Party for the People. The only avenue to a formal coalition would be with the DPP and the Japan Innovation Party which seems unlikely. A government excluding the LDP also seems unlikely to us given opposition party divisions. The LDP more isolated would certainly provide scope for further yen selling with jawboning having limited impact at these levels.

YEN SELLING IS BROAD-BASED VERSUS USD & G10 CURRENCIES

Source: Bloomberg, Macrobond & MUFG GMR

USD: Breakeven employment may have fallen sharply

Price action in FX markets yesterday certainly looked indicative of a further adjustment in positioning with short positioning lightened further. The FX market is where we saw bigger moves relative to other markets with UST bond yields closing only 1-2bps higher. The S&P 500 closed just 0.3% lower highlighting the lack of fundamental news driving the markets yesterday. We’ve highlighted before the extent of US dollar short positioning amongst leveraged/non-commercial market entities and the lack of fundamental news flow is allowing momentum to take precedence, resulting in a continued lightening of positions. The political uncertainties and data in Europe has reinforced negative yen and euro sentiment. The German Industrial Production data on Wednesday was terrible – the 4.3% MoM drop was much larger than expected with US trade tariffs certainly playing a role in the weakness.

Fed comments yesterday were consistent with current market pricing of a Fed rate cut at the next meeting on 29th October and hence had limited impact on US yields. New York Fed President Williams in a New York Times interview signalled that the vacuum of information on the economy would not deter the FOMC from acting at upcoming meetings and stressed that his focus was on the downside risks to the labour market while the inflation data has revealed less upside pressure from tariffs than earlier assumed. His comments reflect what appears to be the majority view on the FOMC that further cuts are likely over coming meetings. The OIS market remains only about 5bps short of two further 25bp cuts this year.

Yesterday, Federal Reserve of Dallas posted a blog outlining analysis conducted in calculating the employment breakeven level – the level of jobs required each month in order to keep the unemployment rate stable. That is an estimate that has gradually been trending down in line with the potential growth rate of the economy and the ageing population. Migration can play a role and given the sudden halt to immigration under President Trump, the Dallas Fed have constructed a new high-frequency estimate of the employment break-even rate and given the immigration decline and other cyclical shifts to labour force participation, this new index reveals the break-even employment rate has dropped from 250k in 2023 to just 30k. This would imply the NFP decline is less a reflection of worsening fundamentals and potential recession and more a healthy correction lower reflecting supply factors. The Pew Research Center has estimated that there has been a decline of 1.4mn immigrants living in the US during the first half of 2025, the first drop since the 1960’s.

The implication of this analysis could be that we need to focus more on the unemployment rate and less on the monthly NFP change and that there is an obvious risk here that the FOMC could over-react and cut too much in anticipation of a slowdown in wage growth that won’t actually materialise. The finding of this analysis is consistent with the fact that this sharp slowdown in payrolls has not coincided with any pick-up in initial claims and that GDP growth remains reasonably solid, helped by the ongoing AI-related investment boom.

LABOUR FORCE GROWTH AMONGST FOREIGN BORN IS LIKELY LOWERING THE EMPLOYMENT BREAKEVEN RATE

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com