06:21 AM EDT, 10/24/2024 (MT Newswires) -- The yen (JOY) rebounded modestly early on Thursday following Wednesday's sharp sell-off, said Mitsubishi UFG.

It resulted in USD/JPY falling closer to the 152.00 level after hitting an intra-day high Wednesday of 153.19, wrote the bank in a note to clients. So far this month, USD/JPY has risen by just over 6% which is the strongest equivalent period of gains since late August/early September 2022. That period was quickly followed by intervention by Japan to support the yen.

In light of recent price action, there is building speculation over the possibility of another of bout of intervention from Japan although it appears unlikely ahead of the United States presidential election given that a Donald Trump victory could trigger more gains for USD/JPY, stated MUFG.

Market speculation over further intervention from Japan was encouraged overnight by comments from Finance Minister Katsunobu Kato who stated "we are seeing one-sided, rapid moves" in the foreign exchange markets, and emphasized that "we will closely monitor the foreign exchange market with a stronger sense of urgency, including watching for speculative trading."

Kato's comments have helped to provide some temporary support for the yen overnight but the gains are likely to prove short-lived if U.S. yields and the US dollar (USD) continue to adjust higher ahead of the U.S. election in anticipation of Trump's victory, pointed out the bank.

Renewed yen weakness could also encourage the Bank of Japan to speed up plans for further monetary tightening after the U.S. election, added MUFG. Governor Kazuo Ueda did indicate overnight that it would be problematic "if you proceed very, very gradually" and trigger expectations that interest rates will stay at low level for a long period.

The governor added that in light of "huge uncertainties, you usually want to proceed cautiously and gradually" when normalizing policy. He is concerned though that if the BoJ takes too long then it could lead to a build-up of huge speculative positions, which could become a problem later, and as a result, policymakers "need to strike balance between the two."

The disorderly financial market conditions triggered by the unwinding of yen-funded carry trades in early summer highlighted risks from the build-up of huge speculative positions, according to the bank. However, the governor didn't give any clear guidance over the likely timing of the next rate hike and/or how far rates will rise in the tightening cycle.

Markets will be scrutinizing closely the BoJ's upcoming policy update at the end of this month to see if Japan's central bank provides any encouragement over the potential for another hike before the end of this year. MUFG is sticking to its forecast for a 25bps hike in December but acknowledges it may be delayed until January.

Further yen weakness would support the bank's earlier BoJ rate hike call.