📝 MOF Could Be Offering "Free Lunch" to The Market: Commerzbank

If the BoJ and MOF act in opposite directions, the success of both - including that of the MOF's intervention strategy - is doubtful. But if it fails with its strategy or merely pursues a "leaning-against-the-wind" policy, JPY weakness could be the result a fortiori. Why? Let's be clear: The foreign exchange market is a zero-sum game. When one player (here: the MOF) pursues a "leaning-against-the-wind" policy, it offers a "free lunch" to the rest of the market if the latter keeps up the pressure on the MOF. This tempting offer may thus just reinforce the depreciation pressure on the yen.

Interest rate cuts in other G10 countries - especially in the U.S. - would reduce the yen's carry disadvantage and could thus - even if the BoJ's monetary policy remains unchanged - take the depreciation pressure off the yen. This is our main scenario. But one should realize that the risks are asymmetric. Things may go somewhat better for the yen than we imply. But it can go dramatically worse. - Commerzbank