When Will Yen Depreciation Continue?
The Yen's Depreciation Continues.
On July 2nd, the yen's exchange rate against the US dollar once again reached a 38-year low. Paul Sheard, an economist who has been closely following the Bank of Japan's policies and former Vice Chairman of S&P Global, told First Financial Daily that the depreciation of the yen itself was not surprising, but what was puzzling was that the yen had not yet hit a low point and rebounded.
David Seif, Chief Economist of Developed Markets at Nomura Securities, said in an exclusive interview with First Financial Daily that when analyzing the trend of the yen, it is necessary to consider the policies of both Japan and the Federal Reserve. The reason for the continuous depreciation of the yen is that Japanese interest rates are very low, and there is a significant gap with other developed markets, especially the United States. The larger and longer this interest rate gap lasts, the stronger the expectation of yen depreciation becomes.
"The timing of the Japanese Ministry of Finance's intervention in the market again depends more on the speed of depreciation," Seif said. "There is a view that if the US dollar-to-yen exchange rate reaches 162, it may trigger intervention. We have already approached this level quite closely, but the key issue is whether it is approaching 162 slowly and steadily, or whether it is due to the rapid depreciation of the yen leading to a rapid rise in the US dollar-to-yen exchange rate." In addition, there is also a market view that Japanese policymakers will not intervene unless the US dollar rises to around 165 against the yen.
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Carry trade has played a significant role in the process of yen depreciation. Investors first borrow yen and then exchange it for other high-yielding currencies for investment, thereby earning the interest rate difference. The depreciation of the yen has increased the attractiveness of carry trade and further pushed the yen lower.
Seif said, "Carry trade is the main thing happening now. Due to the interest rate difference, the cost of shorting yen is very low, and then the funds are converted into other currencies to earn interest rate differences."
Federal Reserve policy has a crucial impact on the yen.
It is worth noting that the direction of Federal Reserve policy has a crucial impact on the yen.
Sheard said that if the interest rate difference is the key factor, then the Federal Reserve's interest rate reduction decision is being closely watched. At the same time, if the economic situation in Japan leads the Bank of Japan to start raising interest rates, this would be a historic shift. If the interest rate is raised by more than 50 basis points to 1% or even 1.5%, the interest rate gap would be significantly narrowed. This would have a very positive impact on the yen and is expected to become a catalyst for changing the market direction. "At the same time, once the trend reverses, it will become the new trend," Sheard said.
Seif, on the other hand, said that the main reason for the yen's recent struggles is not due to significant changes in the Bank of Japan, but due to significant changes in market expectations for the Federal Reserve. Currently, Nomura Securities expects the Federal Reserve to cut interest rates twice this year. Other institutions also generally expect only one to two interest rate cuts within the year, which is a significant reduction compared to the expectations at the beginning of the year.The market is set to receive the US June non-farm payroll data this Friday (the 5th). Saif believes that if the data shows weakness, it will be favorable for the Japanese yen, as this implies that the Federal Reserve will be more inclined to cut interest rates, leading to market expectations that the policy rate gap between the US and Japan will narrow.
Furthermore, the US CPI inflation data to be released next Thursday (the 11th) will be even more significant. "If next week's inflation data allows the Federal Reserve to maintain a dovish stance, it could prompt the yen to start appreciating," Saif said.
Viewpoint: Japan should change its foreign exchange reserves and sell dollars.
On March 19th of this year, the Bank of Japan announced an interest rate hike of 10 basis points, raising the key interest rate from the negative territory to the 0-0.1% range. This was seen as a historic shift, marking the bank's first interest rate hike in 17 years. However, it did not effectively boost the yen.
"This is more of a framework shift," said Shield. "The Bank of Japan has abandoned its long-standing monetary policy framework, stepping away from the quantitative and qualitative easing policy with yield curve control, and directly targeting adjustments to the overnight rate. But this has not really formed an expectation that Japanese banks will enter a long-term interest rate hiking cycle. There is no consensus yet on the specific level of Japanese interest rates in the next 1 to 3 years."
At the end of June, when the yen's exchange rate against the dollar fell to a 38-year low, the Japanese government appointed Atsushi Mimura as the Deputy Minister of Finance, a position that includes overseeing Japan's foreign exchange policy.
"This is a routine rotation," said Shield. However, against the backdrop of the yen's plummet, this appointment still led the market to speculate on how the Japanese government would intervene in the market.
"According to the common rhetoric of Japanese Ministry of Finance officials, they intervene in the currency market in only two situations. First, when the currency deviates from the fundamentals, which is very subjective; second, when the currency fluctuates too much and too quickly," Shield told Yicai, "Although conducting foreign exchange operations in batches can alleviate the immediate fluctuations of the currency, it is almost impossible to reverse the overall trend in reality. So I think it is necessary to discuss whether Japan should make changes in its foreign exchange reserves. If Japan no longer needs about $1 trillion in foreign exchange reserves, it might consider liquidating this part of the assets."
Shield believes that if the yen is too weak against the dollar, Japan does not need to continue holding dollars and can liquidate investment portfolios to observe market reactions. He believes that Japan needs some radical new thinking, and foreign exchange management is one of them.
The Bank of Japan is expected to raise interest rates at the July meeting.In June, the U.S. Department of the Treasury added Japan to its list of countries under surveillance for currency manipulation, causing market concerns that it could affect the Japanese government's intervention in the foreign exchange market. However, Nomura Securities holds a different view. Saitama believes that the impact of this matter is minimal. The measures taken by the Japanese Ministry of Finance are aimed at curbing the depreciation of the yen, not a long-term strategy. However, despite the Japanese authorities issuing a stern warning to the foreign exchange market in June, the intervention was ineffective.
"The intervention effect of the Japanese Ministry of Finance is limited. They can expel speculators in the short term, but the fundamental reason for the yen's weakness is the interest rate gap, and the intervention of the Japanese Ministry of Finance has no effect at all. To stabilize the yen or even revalue it, what is really needed is a change in the monetary policies of the Bank of Japan and the Federal Reserve," Saitama said.
For the market, in addition to the Federal Reserve meeting, the interest rate meeting that the Bank of Japan will hold at the end of July is also crucial. According to a survey, about one-third of economists expect the Bank of Japan to raise interest rates and announce a quantitative tightening roadmap.
Saitama also said that if the Bank of Japan does not raise interest rates at the July meeting, it is very likely to do so in the next few meetings. In addition, the Bank of Japan's previous announcement that it will announce a plan to reduce the purchase of Japanese government bonds (JGBs) in July will also help narrow the policy gap between the two central banks.