The land of the rising sun is facing a sinking currency problem.
Japanese financial authorities are suspected to have stepped in twice within three days to support a plummeting yen.
The most recent intervention allegedly happened on May 1, following the US Federal Reserve’s (the Fed) announcement to keep interest rates steady for now.
On May 2, the yen weakened as much as 1.1% against the dollar to 156.28 in Asia trading, inching closer to levels before the possible intervention.
Japan also intervened to prop up the yen after it hit a multi-decade low against the dollar on April 29, according to unofficial sources, the first suspected intervention since 2022.
These interventions come after weeks of speculation by traders that Tokyo was gearing up to help its beleaguered currency. Traders have turned increasingly bearish on the yen, which has stumbled despite a bull run in Japanese stocks and a wider improvement in the country’s economy.
AsianInvestor asked asset managers how many interventions to prop up the yen could be expected in 2024, and where they think the Japanese yen could reasonably stabilise against the US dollar.
The following responses have been edited for clarity and brevity.
Vincent Chung, associate portfolio manager for diversified income bond strategy
T. Rowe Price
Vincent Chung
Market participants have priced in the possibility of intervention by authorities following the Bank of Japan (BoJ) meeting in May, as indicated by option pricing.
However, the past interventions were mostly ineffective in changing the yen depreciation trend. The average reversal in USD/JPY on days of intervention were about 2% in 2022.
The primary driver of USD/JPY is the interest rate differential over time. The yen longs are likely more reliant on additional Fed rate cuts to be priced into the market rather than the BoJ quickly hiking rates.
Currently, the market is expecting 1.5 rate cuts in 2024 for the US, which means the market has priced out a significant amount of rate cuts.
Furthermore, there are potential risks related to the US elections, which might weigh on major currencies including the yen in the event of a Trump victory and increased tariff uncertainty.
I believe that the yen is expected to depreciate further. But reaching 160 seems too rapid, indicating speculation at play.
That will give the BoJ reasons to act and reduce volatility as the BoJ has said that their focus is primarily on curbing excessive volatility in foreign exhange (FX) markets rather than specific currency levels.
Junichi Inoue, head of Japanese equities and portfolio manager
Janus Henderson Investors
Junichi Inoue
Despite the foreign exchange market being the most liquid market, it has frequently been the subject of speculation. Therefore, it is extremely difficult to predict short-term exchange rates.
However, what can be said is that from the perspective of purchasing power parity, the current exchange rate is considerably oversold.
Of course, this level is justified by the interest rate differential and its sustainability, but I do not think this logic will work forever.
Foreign exchange intervention is carried out based on the G7 rules and is not aimed at achieving a certain level.
The only thing that can be said is that having $1.3 trillion in FX reserves, the second highest level in the world, makes it reckless to target yen for speculative selling.
Currently, the focus is only on US interest rates, but I would also like to point out the risk of Japanese short-term interest rates moving more than market expectations.
In the stock market, the fact that stock prices are formed based on the assumption of an exchange rate of about 130 to 140 USD/JPY is also thought-provoking.
Krishna Bhimavarapu, Asia Pacific economist
State Street Global Advisors
Krishna Bhimavarapu
We think the fair value of USD/JPY is closer to 140 than current levels, but until the Fed develops clearer conviction on rate cuts, authorities in Japan may aim to keep the pair around 155, with 160 clearly being the top end of tolerance.
The Fed’s outcome this week was dovish relative to market expectations, so the yen did not slide as it would have otherwise.
However, if incoming US data feature downside surprises, the yen could just as aggressively appreciate. Hence, we believe there are two sided risks to the yen, and it is vital to avoid any rapid movements.
These two-sided risks mean that there is a higher chance of more interventions, like the three times in 2022.
Furthermore, we expect the BoJ to discuss another rate hike as the yen’s weakness starts showing up in inflation, which may stabilize the yen to a good extent.
Alex Everett, investment manager of fixed income
abrdn
Alex Everett
Japan’s Ministry of Finance (MoF) will be unlikely to look upon this week’s yen intervention as a resounding success. Huge quantities of intervention spending later and USD/JPY remains in the 157-158 region.
We question the value of this activity. The US dollar side of the pair is the key reason for today’s extreme levels in USD/JPY, hence intervention is rather like throwing good money after bad.
Interest rate differentials imply a level closer to 150 but let us not forget that 152 was the expected intervention level just a month or two ago.
To be sure, if USD/JPY breaches 160 again we may see two or three more attempts to stabilise the pair in the months ahead.
A better strategy for a more sustained re-strengthening of the yen would be for the BoJ to make good on the modest tightening cycle it embarked upon in March this year.
Moving earlier than the market expected was a good start.
From here, households’ increased purchasing power following strong wage negotiations will percolate into the real economy.
This should boost consumption and keep up Japan’s new-found inflationary pressure. The BoJ can afford to hike by a further 25 basis points this year.
Sim Moh Siong, currency strategist
Bank of Singapore
Sim Moh Siong
The sharp drop from above 160 for USD/JPY this Monday and rapid yen gains early May 2 are highly suggestive of FX intervention by the MoF to support the yen.
Officials have not confirmed any action, and we are unlikely to know for sure until the MoF discloses its FX operations data on May 31.
However, Bank of Japan current account data for the month of April strongly suggests that an intervention took place on April 29 to the tune of about $35 billion (¥5-6 trillion), but the period in which USD/JPY was below 155 was short-lived.
Intervention can help trigger more wariness towards extending short yen positions.
But realistically, it will take repeated intervention attempts to drive USD/JPY to re-test the 152 breakout point.
USD/JPY could subsequently stabilise in range bound holding pattern around the 150-155 level.
We think the MoF’s motivation for the suspected FX interventions is to buy time before the Fed easing cycle and further BoJ rate hikes kick in to spur greater yen strength by late 2024.
Things could be shifting in the MoF’s favour, as the gameplan for the Fed remains on when to cut rates, not hike.
Howe Chung Wan, managing director and head of Asian fixed income
Principal Asset Management
Howe Chung Wan
The yen depreciation largely due to rates differentials with the US – will only slow down significantly if the rates differentials gap close mostly likely by US rates moving lower.
Don’t expect the gap to close by the BoJ raising rates significantly as we expect the BoJ to take its time to move towards higher rates.
The yen move is in line with the broad strength of US dollar across the board and the relative underperformance would turn around as European central banks begin to ease.
At the most recent meeting, BoJ did not sound overly worried about the yen weakness and the consumer price index prints have been soft.
We still see them more likely to reduce bond purchases first before then next hike.
The risk to taking its time on raising rates would be the weaker yen increases inflation to a point that’s concerning for BoJ in an environment where labour costs are already rising.
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