SINGAPORE/TOKYO (Reuters) – The yen is sliding to new 38-year lows day after day, with market participants wary of Japanese authorities intervening again, as they did in March, to defend the currency.
But a few factors may explain their reluctance.
THE BOJ IS SLOWLY RAISING PRICES
Huge interest rate differentials between the US and Japan have put pressure on the yen, putting monetary policy at the center of the currency’s problems.
With the Federal Reserve signaling it is about to cut rates and the Bank of Japan planning to slowly raise rates from near zero this year, the wide 5 percentage point spread between dollar and yen rates should eventually shrink, which would help arrest or even reverse interest rates. depreciation of the yen.
However, any reprieve for the yen could be limited as rate hikes in Japan are expected to be small and at a gradual pace. The BOJ wants to support economic growth, supported by solid wage growth and sustainable inflation.
THE CARRY TRADE
Slow monetary tightening will help boost the yen’s popularity for carry transactions – borrowing a currency with low interest rates to invest in a currency with higher returns.
For example, yen-funded carry trades in US government bonds yield almost 6% – a powerful incentive for market participants that is difficult for Japan to counter.
Net speculative short positions in the yen are at a 17-year high of 184,223 contracts, data from the Commodity Futures Trading Commission shows.
An inverted U.S. yield curve has also fueled dollar investment in Japanese bonds, and that trading could also come to a halt if the Fed raises rates.
KING’S DOLLAR
The flip side of the yen’s weakness is the dollar’s persistent strength, thanks to the robust US economy.
Not a week goes by without the release of blockbuster data on US jobs or inflation casting a long shadow over the markets. The ever-present risk that a surprise will send the dollar higher creates an uncomfortable environment for currency intervention.
Muffled POLITICAL IMPERATIVE
While the weak yen remains deeply unpopular with the Japanese public – a regular topic of TV news programs and newspaper front pages – the pain it causes may be somewhat blunted by record highs for local stocks and the fastest wage growth in 33 years.
It’s also harder to find the kind of anger that fueled Japan’s first dollar-selling intervention since 1998 in late 2022. Instead, it has been largely replaced by a grudging acceptance that a supersoft currency is part of the country’s current reality.
Moreover, Tokyo would not make another major move into the market without first getting Washington’s approval. This is especially true after being placed back on the Treasury Department’s watchlist for potential currency manipulators.
That said, domestic momentum for action may increase as internal elections for the ruling party’s leadership approach in September.
MAYBE NOT WORTH IT
While markets know Japan has the firepower to get moving again (its foreign reserves are as high as $1.23 trillion), two interventions since September, including spending some $62 billion for the latest dollar round in March, had little impact.
Treasury officials have reiterated their warnings that they are prepared to act, and for now the jaw-dropping has kept the yen’s moves relatively small, slow and steady.
(Reporting by Kevin Buckland and Brigid Riley in Tokyo, Tom Westbrook and Vidya Ranganathan in Singapore; Editing by Edwina Gibbs)