Postponing ‘super yen’, returning to 152 yen per dollar
The effects of two market interventions by the Japanese authorities
“The possibility that the interest rate gap between the US and Japan will narrow is increasing.”
The underlying problem is the fiscal expansionary policy of the United States
“It will take longer to control inflation.”
The buying of the yen, thought to be due to the Japanese government’s intervention in the exchange rate, has put a brake on the ‘higher yen’. It is assessed that the yen-dollar exchange rate over the past three weeks has been at a level that will continue in the history of the Japanese currency.
Japanese monetary authorities are pinning their hopes on a slowing trend in US inflation. Although the power struggle between the Japanese authorities and the market will continue for now, it is assessed that there are weak signs of a reversal in the low yen situation.
According to the Nihon Keizai Shimbun on the 6th, until the end of April, the weakness of the Yen was mainly due to the increase in long-term interest rates in the United States due to the increase in the price index of the United States. Whenever the US long-term interest rate rises, the yen-dollar exchange rate also soars, and the two generally show similar movements.
After the Bank of Japan’s monetary policy decision meeting on the 26th of last month the Yen weakened to an extent that could not be explained by long-term US interest rates. As expectations that the Bank of Japan would respond to the weak yen were dashed, speculative yen selling spread. When the price was above 160 yen per dollar, the Japanese Ministry of Finance eventually stepped in. The market is believed to have started to intervene in buying over 5 trillion yen.
On the 1st, yen sales began to weaken when US Central Bank (Fed) Chairman Jerome Powell denied the possibility of resuming interest rate hikes in a press conference after the Federal Open Market Committee (FOMC). Comments have spread that the Japanese authorities, taking advantage of this opportunity, have once again intervened in large-scale yen purchases. The market believes that more than 3 trillion yen has been spent.
On the 3rd, as the US employment indicator fell below expectations, Yen buying widened. The yen-dollar exchange rate fell just before the yen depreciation accelerated. It returned to around 152 yen per dollar. If it is true that the Japanese government intervened earlier, it brought the value of the yen back to a level consistent with long-term US interest rates.
Market coverage begins now. Morgan Stanley of the United States predicted a reversal rise in the Yen following the intervention of the Japanese government. The Nikkei index rose around 14% this year, but only rose 5% in dollar terms. In a memo on the 3rd, Morgan Stanley analyzed that this ‘abnormally large’ gap is likely to narrow in the future.
It is also positive that the Fed has decided to reduce the pace of quantitative easing (QT). It is expected that the increase in long-term interest rates in the United States will end and the difference in interest rates between the United States and Japan will narrow. The Bank of Japan, struggling to respond to the weak yen, is also expected to raise interest rates in July.
If the US labor market and price indicators show a clear slowdown, the reversal theory in the yen is expected to gain further strength. In a report on the 3rd, Citigroup maintained a dovish forecast that the Fed will begin cutting interest rates in July and reduce it by a total of 1.0 percentage points by the end of the year, saying, “Labor market indicators will show weakness in the coming months.”
What Japan is worried about is that the Biden administration’s fiscal expansion policy is behind inflation in the United States. According to the ‘Fiscal Monitor’ report released by the International Monetary Fund (IMF) in April, the accumulated ‘fiscal shock’ caused by operational finance after the coronavirus outbreak raised the US inflation rate by around 0.5 percentage points in 2023.
While other effects, such as supply constraints and ‘retaliatory consumption’, are diminishing, fiscal factors have continued to contribute to price increases in recent years. The analysis is that if there were no financial shocks, it is likely that the inflation rate from January to March would have been in the mid-2% range, close to the Fed’s target.
The Nippon Keizai Shimbun analyzed, “The real ‘enemy’ in the Fed’s fight against inflation is fiscal policy,” and added, “Regardless of the outcome of the US presidential election, it is unlikely that the US Congress will unite on fiscal consolidation. ” It is true that there is a glimmer of light in the Japanese authorities’ fight against the low yen, but it is taken that it is too early to conclude that it is a victory for the authorities.
Tokyo = Correspondent Kim Il-gyu
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