Per reporter: Cai Ding Per editor: Lan Suying
As the yen continues to fall against the dollar and approaches the important psychological mark of 150, market expectations for another intervention by the Japanese authorities in the short term have heated up sharply.
At the same time, Japanese officials have repeatedly warned the market that they will take decisive action to combat the sharp fluctuations in the yen exchange rate caused by speculation. Finance Minister Shunichi Suzuki said on Wednesday that the Japanese government would make an "appropriate response" in the foreign exchange market in accordance with existing policies.
There have been reports that there has been speculation in the market that the Japanese government and the central bank may have intervened in the market without an announcement due to the reduction of excess reserves deposited by various institutions at the Bank of Japan.
With expectations that the Fed will continue to raise interest rates sharply, can the yen hold the 150 mark?
Repeated warnings, or "covertly" intervened?
At 14:00 Beijing time on Wednesday, October 19, the dollar continued to break up against the yen, hitting 149.4150 during the session, a new high since August 1990. USDJPY edged down to 149.28 at press time.
Image source: Yingwei Finance
Next, whether the yen will fall below the important psychological mark of 150 has become the focus of market attention.
Japanese authorities reiterated their warning of a sharp depreciation of the yen on October 19, with Finance Minister Shunichi Suzuki saying he was "cautiously" increasing the frequency of exchange rate checks, Reuters reported, citing local media. At the same time, according to Japan's Jiji news agency, Shunichi Suzuki said that the Japanese government will make an "appropriate response" in the foreign exchange market in accordance with existing policies.
The "Daily Economic News" reporter noticed that just the day before, Shunichi Suzuki also made a similar statement. At the same time, he reiterated that the authorities can intervene in the foreign exchange market without any announcement.
The reporter combed through and found that since the beginning of September this year, the Japanese authorities have issued verbal warnings about the fall of the yen almost every day. Back in April this year, Shunichi Suzuki first admitted that a weaker yen was bad for the Japanese economy, when USDJPY hovered at the 126 level. However, as the yen has weakened sharply, the dollar has appreciated nearly 30% against the yen during the year.
Policymakers once thought that Japan's trade-oriented economy would hit it with a stronger yen, but now they worry that a sharp depreciation of the yen is pushing up already high commodity import costs, squeezing household spending and disrupting business plans.
Last month, Japanese authorities used 2.8 trillion yen ($18.81 billion) to intervene in the currency market (i.e., selling dollars and buying yen), the first time since 1998 that the authorities have supported the yen in this way.
Reuters quoted data released by the Bank of Japan on Friday that as of Monday, Oct. 17, the excess reserves deposited by institutions at the Bank of Japan could be reduced by 4.09 trillion yen, possibly in part due to actions related to currency market intervention. The shortfall may reflect the authorities' intervention in buying yen and selling dollars, which has also sparked speculation among market participants that the Japanese government and the central bank may have intervened in the market without an announcement.
In addition, the US Treasury released the International Capital Flows Report (TIC) for August 2022 on Tuesday local time. Although six of the top eight overseas "creditors" in the United States increased their holdings of US Treasuries in the same month, Japan, the largest "creditor" of the United States, reduced its holdings by $34.5 billion, about 16 times the size of the reduction in July (about $2 billion).
The Daily Economic News reporter also noted that this is the second consecutive month that Japan has reduced its holdings of US Treasury bonds. Although it is still the largest overseas "creditor" of the United States, its holdings have hit a new low since December 2019.
Analyst: There is a high probability that the yen will fall below the 150 mark in the short term
Image source: Photo by Xinhua News Agency reporter Zhang Xiaoyu
Japanese Prime Minister Fumio Kishida warned at a parliamentary meeting on Tuesday that large fluctuations in the yen due to speculation were problematic.
Kishida meanwhile dismissed the prevailing view that the Bank of Japan's ultra-loose monetary policy is largely responsible for the sharp depreciation of the yen. He said that exchange rate fluctuations depend on a variety of factors, not just the interest rate differential between the United States and Japan. "The Bank of Japan decides monetary policy not only on the basis of exchange rate movements, but also on a combination of economic and price developments and the impact on small and medium-sized enterprises." He explained.
Following Kishida's speech, Bank of Japan Governor Haruhiko Kuroda also reiterated his consistent position on Wednesday that stability in the foreign exchange market is "extremely important" and described the recent weakening of the yen as sharp and one-sided. Kuroda told a parliamentary committee that "the weakening of the yen makes it difficult for companies to formulate business plans and increases uncertainty about the outlook for companies." This is negative and undesirable for our economy. ”
In a speech late on Wednesday, Seiji Anda, a member of the BOJ's executive committee, also noted that it was premature to abandon the BOJ's ultra-loose monetary policy amid growing risks from slowing global growth and financial market turmoil.
Seiji Azuhi said that if monetary policy is used to deal with short-term exchange rate fluctuations, it will increase uncertainty about the Bank of Japan's policy guidance, which will not only cause more damage to the Japanese economy, but also rule out the possibility of reversing the decline of the yen by raising interest rates. In his speech, he noted that "looking at the global financial and economic environment, downside risks are rapidly accumulating. With downside risks so high, we should be cautious about shifting to monetary tightening. He also warned that intensifying external headwinds could push Japan back into deflation.
Japan's largest financial institution, Mitsubishi UFJ Financial Group, believes that under the expectation of a continued strong dollar, there is a high probability that the dollar will break 150 against the yen in the short term.
Derek Halpenny, head of global market research at MUFG Financial Group, said in an email to the Daily Economic News that "we still believe that the above-expected inflation data will reinforce expectations of further sharp rate hikes by the Fed at its November and December meetings." While we believe core inflation in the US will peak soon, the Fed needs CPI to decline continuously for at least 2~3 months, which means that the Fed may pause rate hikes at a meeting in the first quarter of 2023. Such expectations undoubtedly open the door for the continued strength of the dollar. ”
"Since the Bank of Japan's intervention in the currency market in September caused USDJPY to break through 145.9 on the same day, USDJPY has continued to rise, pushing up expectations that the Japanese authorities will intervene again. Japan's Ministry of Finance has linked intervention to 'disorderly markets', a claim that could be cited again by the authorities if the current weak yen continues. For now, we remain bullish on USDJPY as the fundamental backdrop of the USD dictates that USDJPY will continue to move higher. Therefore, there is a greater chance of breaking above 150 new highs above 150 in the short term (USDJPY). Derek Halpenny's team added.
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