JAPAN: "JAPAN TOP CURRENCY DIPLOMAT MIMURA: NO COMMENT ON YEN MOVES" RTRS

Secretary General Mark Rutte is speaking at a presser in Berlin alongside German Chancellor Friedrich Merz and Defence Minister Boris Pistorius (livestream here). The meeting comes ahead of the NATO summit in Ankara, Turkey, on 7-8 July, and days after Germany and the Netherlands established a military command centre in the Baltic region that will see the two countries directing some NATO efforts on its eastern flank. The move comes as part of a concerted effort from European NATO countries to demonstrate to the US that they are taking on more of the burden-sharing when it comes to the continent's defence. 

• It is not only by taking on a greater role in military leadership that Berlin is looking to bolster its standing with the US. The FT reported on 30 June that, according to its sources, Germany is looking to develop “joint production concepts” that could see US weapons built in Germany. This would allow Europe to bolster its defences, keep the US invested in Europe, and potentially ease US production constraints amid a dwindling of stockpiles following the attacks on Iran. However, the article notes that the US may be reluctant to allow high-level military tech to be produced abroad.
• While maintaining Europe's defences and helping the Euro-US relationship is important for Germany, such a development could also, over the long term, prove a boon for Germany's flagging manufacturing sector. The country's autos sector, among others, faces intense competition from Chinese imports, and an expansion in high-value arms manufacturing could go some way to filling the gaps. 

Markets continue to price for short-term JPY volatility - evident in the implied/realised vol ratio holding well clear of the G10 FX average. For the one-week maturity, implied vols trade over 3x higher than realised - a significant premium over the G10 FX average of 1.25 times. Paradoxically, front-end USDJPY realised vols are hitting the lowest levels in several years thanks to the slow-crawl pattern of JPY depreciation and the aggressive buying of USDJPY dips we've observed across the past few weeks - a key driver of this market dislocation.

Source: MNI / Bloomberg Finance L.P.

The net effect is that spot USDJPY can continue to edge higher and trade through significant psychological hurdles without triggering any breakout in risk reversals.

Instead, hedging markets have been undeterred by the extensive run of higher highs and higher lows - evident in the persistent demand for USDJPY upside via options, pressuring a running put/call ratio. DTCC tracked options trade shows consistent buying of USDJPY calls with strikes of Y163.00 or above, suggesting markets still see scope for further near-term gains despite the threat of formal intervention from the Japanese authorities - or even bilateral intervention in concert with the US Treasury.

Source: MNI / DTCC

This compressed vol profile and strong demand for USDJPY upside via options may raise questions about the market's net position - particularly as a break of Y163.00 could trigger additional spot demand as options dealers looking to keep a lid on their presumed short gamma position. 

The Netherland has announced it will be looking to sell the following at its auction next Monday, June 6:

• E1.0-2.0bln of the 2.5-month Sep 29, 2026 DTC
• E1.0-2.0bln of the 3.5-month Oct 29, 2026 DTC