Bridget Riley
TOKYO (Reuters) – As the yen falls to its lowest level in three decades and pressure grows on Japan to intervene or make monetary policy changes, traders believe there is little Tokyo can do to reverse the currency’s decline, while while interest rates and dynamics are heavily skewed against it. .
The Bank of Japan (BOJ) will set policy on Friday, with little expectation of a rate hike.
It has no currency mandate, but a weakened yen, at a 34-year low against the dollar and a record low in real terms, is weighing on inflation as it raises import prices.
Politicians called the rate cut excessive, and Bank of Japan Governor Kazuo Ueda hinted at future rate hikes.
However, currency traders, caught in the thrall of a rising dollar, barely stopped shorting the yen during about 16 months of important and theoretically positive moves for the yen, culminating with the Bank of Japan’s first rate hike in 17 years in March.
Japan has abandoned yield caps and negative interest rates. The central bank announced a retreat from the bond market. Yet the yen remains the cheapest major currency to borrow and short sell, effectively sealing its fate.
“In the short term, the Bank of Japan’s rate hike may not have a significant impact on the yen. Currently, the yen is more exposed to US rates and the yield differential is significant,” said Nathan Swamy, head of foreign exchange trading for Asia-Pacific. at Citi in Singapore.
“It may take some time for the BOJ to fully normalize policy, and that should start to help the yen strengthen, but the key question is what the Fed does in the meantime.”
remove advertising
.
To the delight of yen bears, markets are increasingly expecting the Fed to take little action. Prices for the Federal Reserve’s six interest rate cuts this year have eased amid signs of robust U.S. inflation and economic strength. Now barely two are expected.
As a result, short-term rates in the US remain above 5.25% for longer, while short-term rates in Japan remain at 0.1%, meaning that the 22 bps increase envisaged for Japan in this year, is unlikely to move the dial.
At ten years, US bond yields are 375 basis points higher than Japanese bond yields, with a gap of just over 400 bps. last year was the largest in two decades.
This week the yen traded at 155.74. It has fallen 9.4% against the dollar this year and has lost more than 33% of its value in three years. This year the growth was 4.3%.
“When the dust settles, you’ll still be faced with a significant difference in interest rates,” said Bart Wakabayashi, the company’s branch manager. State Street (NYSE:) in Tokyo.
IT IS DONE
Market attention at the BOJ meeting is largely focused on three elements: policymakers’ inflation forecasts (where growth will mean higher rates), Governor Ueda’s tone at his press conference and the central bank’s bond buying plans.
On all fronts, investors believe the central bank’s ability to influence or surprise markets is limited, especially since it already made a landmark exit from negative rates at its meeting in March.
Inflation is just emerging and stands at 2.7%, which is much lower than in the West. A sharp (over-the-counter) increase in borrowing rates would be devastating for Japan’s heavily indebted government and economy and should probably be avoided.
remove advertising
.
Government bonds offer yields well below foreign sovereign bonds, which have attracted a steady flow of Japanese money overseas, putting pressure on the yen. The market is also so dominated by the Bank of Japan, which owns more than half of Japan’s quadrillion or so issued debt, that it is expected to take at least years for the borrowing to recover.
Even if the Bank of Japan were to cut its 6 trillion yen monthly purchases by about one trillion yen, it would lift the 10-year yield by only about two basis points, says Nomura strategist Naka Matsuzawa – hardly enough to change investment flows.
“In principle, I think the Bank of Japan did its job at the March meeting, including supporting the yen,” he said.
Of course, currency market speculators have held the largest short position in the yen for 17 years, meaning a political surprise would likely spook them and send the yen sharply higher.
The intervention will also lead to the liquidation of short positions, but it is unlikely that it will be able to reverse the yen exchange rate on its own. Even large bursts of yen buying are just a drop in the bucket compared to the $7.5 trillion that changes hands every day in the foreign exchange market.
In 2022, Japan is estimated to have spent about $60 billion defending its currency.
“The intervention will definitely help crowd out speculative positioning in the short term,” said Citi’s Nathan Swamy.
“However, this may not fundamentally change the exchange rate… as we saw in the last rounds of intervention in September and October 2022, the yen did strengthen significantly initially after the intervention, but perhaps subject to the long-term yen having better entry levels to re-enter “
remove advertising
.
($1 = 155.4600 yen)