Adapted from an article originally published by Futu News: “The Japanese Yen is Under Pressure and the Hawkish Risks”
The Japanese yen (JPY) has been experiencing persistent weakness in the face of a strengthening US dollar (USD) and firm hawkish signals from the Federal Reserve (Fed). At the core of this trend are growing expectations for a divergence in monetary policies between the US and Japan, with rising yields in the US contrasting with the ultra-loose monetary path held by the Bank of Japan (BOJ). The yen’s recent performance has highlighted intensified pressure, prompting increased scrutiny from both markets and policy officials.
Monetary Policy Divergence: A Core Driver of Yen Weakness
– The Federal Reserve has remained steadfastly hawkish in its forward guidance, keeping the door open for additional interest rate hikes should inflation fail to moderate toward its 2% target.
– In contrast, the Bank of Japan has reiterated its ultra-accommodative stance, maintaining its short-term interest rate at -0.1% and continuing yield curve control measures to support Japan’s fragile economic recovery.
– The widely divergent policy approaches between the two central banks have led to a widening interest rate differential, favoring capital outflows from Japan and increasing downward pressure on the yen.
– The yield on US Treasury bonds has been hovering near multi-year highs, attracting foreign capital and boosting the USD.
– The BOJ’s reluctance to significantly tighten monetary policy, even as inflation in Japan exceeds its 2% target, has led to a perception that Japan’s central bank lags other major central banks, further weakening the yen’s allure.
Verbal Interventions and Market Response
– Amid the yen’s ongoing depreciation, Japanese officials have increased their verbal warnings to signal discomfort with the rapid pace of the decline.
– Top currency diplomat Masato Kanda stated that Japanese authorities are closely monitoring currency movements with “a high sense of urgency” and that they are prepared to act against excessive volatility.
– Prior interventions from Japanese authorities have included direct market actions, such as the yen-buying measures enacted in 2022, when the Japanese currency fell beyond 150 per dollar.
– However, repeated verbal interventions in 2024 have done little to sustain a meaningful reversal in the yen’s trajectory, as market participants remain focused on macroeconomic fundamentals rather than short-term governmental warnings.
Key Factors Exerting Pressure on the Yen
The continuous decline of the yen is not solely the result of interest rate differentials. Several other macroeconomic and geopolitical factors play a significant role.
1. Limited Scope for BOJ Hikes
– While inflation in Japan has remained above the central bank’s 2% target, policymakers have indicated a preference for cautious normalization, citing concerns over wage growth sustainability and the risks of undermining a still-fragile economic recovery.
– BOJ governor Kazuo Ueda has signaled that while the central bank may consider gradually adjusting interest rates, the process is expected to be very slow and dependent on data.
2. US Economic Strength
– The robust nature of the US economy, particularly its labor market and consumer sectors, has fueled expectations that the Federal Reserve may delay any rate cuts or potentially hike rates further.
– Solid US economic data continues to support USD strength and adds further downward pressure on the yen through investment flows seeking higher returns.
3. Carry Trade Activity
– The persistent low interest rate environment in Japan facilitates the carry trade, where investors borrow yen at low rates to invest in higher-yielding assets abroad, further weakening the yen.
– As long as the BOJ maintains ultra-low rates, such strategies are likely to continue and contribute to ongoing depreciation.
4. Limited Effectiveness of Interventions
– While Japanese policymakers have occasionally stepped into markets to stabilize the yen through interventions, the effect tends to be short-lived unless coordinated with fundamental shifts in monetary policy.
– Market participants remain skeptical about the long-term viability of defending a currency that lacks underlying support from interest rates or expectations of eventual
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