The yen rose on Monday, helped by comments from Bank of Japan Governor Kazuo Ueda, which left room for short-term interest rate hikes.
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Japan’s Finance Minister Satsuki Katayama increasingly finds herself in an unenviable position on the foreign exchange front.
This comes after the Bank of Japan raised its policy interest rate to the highest level in more than 30 years, injecting more than 11.7 trillion yen ($72.8 billion) in foreign exchange reserves to support the currency in April and May. circle The exchange rate against the dollar remains sluggish at around 160 yen.
Masahiko Lu, senior fixed income strategist at State Street Investment Management, said the rate hike is widely expected and would be more than a “band-aid on a bullet wound” for the yen.
Additionally, Japanese officials, including Katayama, signaled multiple times in early June that Japan was prepared to take “decisive action” against excessive fluctuations in the yen. Ironically, that very signal served to reduce the element of surprise and thus the effectiveness of any intervention.
“Policymakers have sent the warning so clearly that a pre-emptive strike may only provide temporary relief,” Lu said.
On April 30, the yen soared against the dollar from 160.39 yen to 156.6 sen, sparking speculation that Tokyo had entered the market. The next day the currency rose to about $155, but then began to fall again.
Experts told CNBC that Japan likely intervened again during the Golden Week period in early May, when the yen was trading at around 158 yen, to stem the decline in the value of the yen. However, this could not stop the yen from moving back towards the 160 yen level.
The reason that interventions and interest rate hikes have not helped curb the yen’s depreciation is due to structural factors weighing against the currency.
While the Bank of Japan is tightening policy, Naka Matsuzawa, chief market research strategist at Nomura Securities, said in a note Wednesday that U.S. Treasury yields remain high and so-called carry trades remain attractive.
A carry trade is when an investor borrows in a low-interest currency, such as the Japanese yen, and invests it in other high-yield assets.
yield of 10 year government bond The current yield is 2.64%, while the 10-year US Treasury yield is 4.451%. That difference is enough to keep the carry trade going.
Another factor is politics. Matsuzawa said Prime Minister Sanae Takaichi’s government has taken a reflationary stance and supports monetary easing policies to boost Japan’s growth. That, in turn, clouds the policy outlook and curbs capital flows into Japan.
In February, Japan’s prime minister appointed two academics believed to have dovish positions to the Bank of Japan’s board. According to Reuters, members Toichiro Asada and Ayano Sato belong to the reflationist group, which advocates an expansive fiscal and monetary plan.
Asada is currently a Bank of Japan board member and was the only vote against the Bank of Japan’s interest rate hike on Tuesday. Ms. Sato will succeed Director Junko Nakagawa at the end of June.
As prices continue to soar due to the Iran war, the yen is also under pressure as Japan relies heavily on imported energy and purchases dollars to purchase energy.
“Currency intervention is carried out to curb rising volatility and prevent speculative yen selling by market participants. For now, the authorities are likely still in the stage of closely monitoring price trends,” Hirofumi Suzuki, head of Sumitomo Mitsui Banking’s research group, told CNBC.
However, in the short term, intervention remains highly likely. Nomura’s Matsuzawa said, “The market’s speculative yen short positions have risen even further, exceeding the level before the Golden Week intervention.”
The resolution of the Middle East war and the resumption of shipping through the Strait of Hormuz following the US-Iran deal will help countries such as Japan reduce energy import costs and ease currency pressure.
State Street’s Mr. Lu said long-term capital flows could also support the yen, as AI-related investment, overseas interest in Japanese stocks, and a technology-driven rise in the Nikkei Stock Average draw capital to Japan.
