SINGAPORE (Reuters) – The Japanese yen is at a three-decade low and under enough pressure to prompt sharp official warnings of intervention to support it.
The yen fell despite Japan’s first interest rate hike since 2007 and optimism about the economy. On April 10, it was trading at 153.24 per dollar, its lowest level since 1990, and in real terms it is at its lowest level since at least the 1970s.
A weaker yen is a boon for the profits of Japanese exporters and for tourists visiting Japan, who find their currency continuing to appreciate but putting pressure on households due to higher import costs.
Here are some of the reasons for the slide:
RATES
Interest rates and dynamics are powerful forces in foreign exchange markets. Both are against the yen. The yen has fallen steadily for more than three years and has lost about a third of its value since the start of 2021.
The yen is also the G10 currency with the lowest rate or yield. This means investors borrow it cheap and sell it to invest in higher-yielding currencies, causing its price to decline.
These trades, known as carry trades, are especially attractive when overall market volatility is low, as it is now, as fundamental differences in rates move markets.
Short-term rates in Japan are held below 0.1% and are not expected to rise further.
Short-term rates in the US are at 5.25-5.5%, and a rate cut in the US is not expected until September or November.
The gap in US and Japanese 10-year government bond yields is almost 370 bps.
RESTART
In March, Japan’s central bank made a historic move away from negative interest rates. But the move was so well publicized that it did not lead to sharp appreciation in the future, allowing investors to safely increase short positions in the yen.
In April, yen shorts reached a ten-year high.
The rate situation is also helping to keep big Japanese investors’ money overseas, where they can reap higher returns.
Japan Post Bank and Japan Post Insurance, among the largest financial firms, told Reuters their portfolios would not change radically in response to the Bank of Japan’s policy change.
ANSWER
The yen-dollar exchange rate has surpassed the level that prompted intervention in 2022, and markets are concerned about the possibility of the government buying the yen to support the currency.
Finance Minister Shunichi Suzuki promised “decisive action” against speculative activity in late March, a statement that preceded an earlier intervention to buy the yen. Traders are now focusing on the 153 to 155 range as the red intervention zone.
REAL CONDITIONS
The yen’s February real effective exchange rate index of 70.25 is the lowest since the Bank of International Settlements began keeping records in 1994 and lower than any of the Bank of Japan’s retrospective forecasts dating back to 1970.
This means tourist dollars are going further than they have in generations and tourism is booming. Japan’s current account has been in surplus for 13 months thanks to tourism revenue, and February’s 2.79 million visitors were a record for the month.
However, domestic consumption has proven to be a weak spot in Japan’s fragile economic recovery as households tend to be net importers and face higher prices due to the weak yen.
Outside Japan, some analysts say the yen’s weakness threatens to undermine the competitive advantage of Chinese producers and suggest it could be behind the yuan’s recent slide, even though authorities in China maintain tight control over the currency.