By Brigid Riley
TOKYO (Reuters) – With the yen hitting a 30-year low and pressure mounting on Japan to intervene or make changes to monetary policy, traders believe there is not much Tokyo can do to to reverse the currency’s decline, while interest rates and momentum are heavily against it.
The Bank of Japan (BOJ) will determine its policy on Friday and expects virtually no interest rate increase.
The country has no currency mandate, but a weakened yen, which is at a 34-year low for the dollar and a record low in real terms, is affecting inflation by raising import prices.
Politicians have described its decline as excessive and BOJ Governor Kazuo Ueda has hinted at future rate hikes.
Yet foreign exchange market traders, captivated by the rising dollar, have barely stopped selling the yen during some 16 months of significant and theoretically positive shifts in the yen, culminating in March’s first rate hike. BOJ in seventeen years.
Japan has abolished interest rate ceilings and negative interest rates. The central bank has announced a withdrawal from the bond market. And still, the yen has remained the cheapest major currency to borrow and sell short, all but sealing its fate.
“In the short term, the BOJ raising policy rates may not make a material difference to the yen. The yen is currently more driven by US rates and the yield differential, which is significant,” said Nathan Swami, head of foreign exchange trading in Asia Pacific. at Citi in Singapore.
“It may take a while for the BOJ to fully normalize policy and that should help strengthen the yen, but the key question is what the Fed does in the meantime.”
Remove ads
.
To the delight of yen bearers, markets increasingly expect the Fed to not do much. Pricing for as many as six Federal Reserve rate cuts this year has fallen after signs of persistent U.S. inflation and economic strength. Barely two are now expected.
This means that US short-term rates will remain above 5.25% for longer, while Japanese short-term rates will remain at 0.1%, meaning that the 22 bp increase priced in for Japan this year has little impact on the price.
On the ten-year term, US yields are 375 basis points higher than Japanese yields, with the difference not far removed from last year’s more than 400 basis points – the largest in twenty years.
The yen traded as low as 155.74 this week. The dollar is down 9.4% against the greenback this year and has lost more than 33% of its value in three years. This year the increase is 4.3%.
“When the dust has settled, you are still looking at a significant interest rate difference,” says Bart Wakabayashi, branch manager at State Street (NYSE:) in Tokyo.
JOB DONE
The market focus at the BoJ meeting is mainly on three elements: policymakers’ inflation forecasts – where a rise would imply higher interest rates – Governor Ueda’s tone at his press conference, and the central bank’s bond-buying plans.
On all fronts, investors view the central bank’s ability to move or surprise markets as limited, especially since it already achieved a landmark exit from negative rates at its March meeting.
Inflation is on the rise and at 2.7% is much lower than in the West. A sharp (OTC:) increase in interest rates would be disruptive to Japan’s heavily indebted government and economy and is therefore likely to be avoided.
Remove ads
.
Government bonds offer yields well below those of foreign government bonds, which draw a steady flow of Japanese money abroad, weighing on the yen. The market is also so dominated by the BOJ, which owns about half of Japan’s trillion yen in issued debt, that a resolution is expected to take years at least.
Even if the BOJ were to cut its purchases of 6 trillion yen a month by about a trillion yen, it would only raise 10-year yields by about two basis points, Nomura strategist Naka Matsuzawa said – hardly enough to shift investment flows.
“In principle, I think the BOJ did its job at the March meeting, including supporting the yen,” he said.
To be fair, currency market speculators have their largest short position in the yen in 17 years, meaning a policy surprise would likely deter them and send the yen rising sharply.
Intervention could also remove short positions, but in itself this is considered unlikely to reverse the yen’s price. Even large amounts of yen purchases are just a drop in the bucket compared to the $7.5 trillion that changes hands in the foreign exchange market every day.
Japan is estimated to have spent as much as $60 billion defending the currency by 2022.
“Intervention would certainly help dispel speculative positioning in the near term,” said Citi’s Nathan Swami.
“However, it may not fundamentally change the path of the currency… as we saw during the last rounds of intervention in September and October 2022, the yen initially strengthened significantly after the intervention, but in the longer term the yen could have potentially offered better entry levels. re-enter.”
Remove ads
.
($1 = 155.4600 yen)
