Currency traders have warned the Japanese government that multiple actions will be needed to prop up the yen, given that economic forces are likely to weaken the yen further.
The yen exchange rate suddenly skyrocketed during Asian time on the 29th, which was a public holiday in Japan. The move sparked speculation that Japan’s monetary authorities had run out of patience with the weaker yen and had followed through on a warning to support yen buying.
The yen has fallen about 10% against the dollar this year, the biggest decline among the G10 currencies. On the 29th, the dollar at one point hit a new low of 160 yen and 17 sen, the lowest in 34 years. It skyrocketed immediately after that.
Voices shouting “160 yen” all at once, traders panic as the yen fluctuates – holidays are ruined
The problem for Fumio Kishida’s government, traders and strategists say, is the need to sustain any intervention. This is especially true as the market is bracing for the U.S. Federal Reserve to emphasize this week that it will keep interest rates higher for longer, making the dollar more attractive.
Yusuke Miyairi, a currency strategist at Nomura International, points out that unless there is a change in the macroeconomic situation, a re-entry into the 160 yen level is within sight. He said the yen trading on the 29th showed that the market was not too afraid of a fight with the Treasury when it came to foreign exchange.
Analysts at Citigroup said that the U.S. yen’s yen rate will rise as the U.S. Federal Open Market Committee (FOMC) meets from April 30 to May 1, and markets will be closely monitoring key economic indicators to gauge whether the U.S. economy is weakening. The market price is expected to remain in the 155-160 yen range.
The yen is on track to decline for the fourth straight month. Last week, traders found another reason to sell the yen after the Bank of Japan kept interest rates unchanged at 0-0.1% as expected and did not signal that it would reduce its bond purchases. Meanwhile, in the United States, the financial authorities are expected to maintain policy interest rates at a level approximately 5 percentage points higher than in Japan until the October-December period (fourth quarter).
Bank of Japan Governor: If yen depreciation affects underlying prices, it will be a factor in decision-making – monetary policy will be maintained
Leah Traub, a portfolio manager at Lord Abbett, said of the yen’s exchange rate, “It’s a result of the difference in interest rates between Japan and the U.S., which is especially relevant this year.”
The move in the Asian time zone appeared to be an intervention by the authorities, but “the impact of such ad hoc intervention will be fairly short-lived,” he said, adding, “If the Bank of Japan and the Ministry of Finance want to prevent further yen depreciation, “The guidance will need to be revised to reflect the path to reducing government bond purchases and raising interest rates.”
m employment statistics
Economic indicators released this week will also be important. The focus is on April’s US employment statistics, which will be released on May 3rd. Weak numbers could reignite expectations that the U.S. Federal Reserve will ease the economy sooner than current market expectations.
Weak U.S. employment data may help Japan’s Treasury, says Nomura’s Miyairi.
All of these points indicate that Japan’s monetary authorities may be forced into a tough battle as they seek to prop up the yen’s exchange rate.
“The biggest mistake in unbacked intervention is drawing red lines,” said Tom Fitzpatrick, managing director of global market insights at R.J. O’Brien & Associates.
If Japanese portfolio managers expect the dollar to continue or strengthen, it could be an opportunity to invest in additional U.S. bond assets without hedging, he said.
“For Japanese investors, it’s a gift,” he said.
Original title:Yen Traders See Uphill Battle for Japan to Halt Currency’s Slide(excerpt)
(Updates by adding the 7th paragraph onwards)