The Japanese Yen (JPY) tumbled in 2022. After breaking above 116, a level that offered stiff resistance, the USD/JPY exchange rate did not look back anymore and now threatens to move above 150.
In other words, being short the JPY was the trade of the year so far. While the run was nothing short of amazing, the JPY short trade looks fishy at the current levels. That is especially the case of the USD/JPY exchange rate, which prompted the first FX market intervention from the Bank of Japan since 1998.
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So here are four reasons to avoid selling the JPY anymore in 2022:
- The Bank of Japan is not happy with the rapid pace of the JPY depreciation
- Inflation picks up in Japan
- End of the year profit-taking
The Bank of Japan stands ready to intervene
Last month, the Bank of Japan intervened in the currency market. It sold US dollars and bought Japanese yen in a move that triggered intense volatility in the JPY exchange rates.
At the time, the USD/JPY traded at 146, and the intervention sent it back to 140 in the blink o af an eye. Now that the USD/JPY Exchange rate trades above 149, the question is, what is the level at which the Bank of Japan stands ready to intervene?
In any case, shorting the yen here comes at the risk of fighting against one of the most aggressive central banks in the world.
Inflation picks up in Japan
The Bank of Japan is the only major central bank that kept the monetary policy easy while others are tightening it. As such, the JPY plunge over 2022 makes sense, at least from an interest rate differential perspective.
The reason for the Bank of Japan taking a different course of action was to create inflation. It struggled with inflation for decades, and now it is viewed as having a chance to achieve it.
It did achieve it, at least some, as reflected by the price increases at major Japanese restaurant chains. Hence, by staying short the JPY here, the trader might face a change of course from the Bank of Japan as inflation is finally picking up.
End-of-the-year profit-taking
Finally, one should never discount the end-of-the-year profit-taking. Imagine you are one of those that sold the JPY at the start of the trading year.
As we get closer to the end of 2022, profit-taking should put pressure on the JPY pairs. More precisely, to close a long USD/JPY position, the effect on the market would be a short position.
All in all, the JPY pairs rallied, but the chances are that the rally might stall as we get closer to the end of the trading year.
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