Why Japan’s intervention and a rate hike didn’t prop up the yen more
The yen rose on Monday, helped by comments from Bank of Japan Governor Kazuo Ueda that left the door open for a rate hike in the near term.
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Japanese Finance Minister Satsuki Katayama finds herself in an increasingly unenviable position on the foreign exchange front.
After deployment 11.7 trillion yen ($72.8 billion) foreign exchange reserves Supporting the currency from April to May and the Bank of Japan raising policy rates to the highest level in more than three decades. yen It is still hovering around 160 against the dollar.
The rate hike is widely expected and is little more than a “Band-Aid on a bullet wound” for the yen, said Masahiko Loo, senior fixed income strategist at State Street Investment Management.
Additionally, Japanese officials, including Katayama signaled It was repeatedly said in early June that Japan was preparing to take “decisive action” against extreme volatility in the yen; Ironically, these signals helped reduce the element of surprise and, by extension, the effectiveness of any intervention.
“Policymakers have telegraphed their warnings so clearly that a preemptive strike may only bring temporary relief,” Loo said.
On April 30, the yen gained sharply from 160.39 to 156.6 against the US dollar, sparking speculation that Tokyo was stepping into the market. The currency strengthened to around 155 the next day, but began to weaken again.
To stem the decline, experts told CNBC that Japan could intervene again during Japan’s Golden Week holiday in early May, when the yen is around 158. However, this did not prevent the currency from falling towards the 160 level.
The reason why intervention and interest rate hikes did not help curb the yen’s decline is due to structural factors lagging the currency.
As BOJ tightens policy, Nomura’s chief strategist for market strategy research U.S. bond yields remain high, making the so-called carry trade still attractive, Naka Matsuzawa said in a note on Wednesday.
Carry trading means investors borrow money in a low-interest currency such as the Japanese yen and invest in high-yielding assets elsewhere.
yield on 10 years of JGBs It is currently at 2.64%, while 10-year US Treasury bond yields are at 4.451%. This difference is sufficient for the carry trade to continue.
Another factor is politics. Matsuzawa said Prime Minister Sanae Takaichi’s administration has a reflationist stance, favoring a loose monetary policy to boost growth in Japan. This clouds the policy outlook and keeps fund inflows to Japan under control.
In February, the Japanese prime minister nominated two academics who were reported to have a dovish attitude to the BOJ board of directors. Members Toichiro Asada and Ayano Sato are among a group of reflationists who advocate expansionary fiscal and monetary ideas. According to Reuters.
Asada is currently on the BOJ board and was the sole dissenting vote when the central bank raised interest rates on Tuesday. Sato will replace board member Junko Nakagawa at the end of June.
Japan’s heavy reliance on imported energy at a time when the Iran war was keeping prices high also put pressure on the yen as the country bought dollars to buy energy.
“The currency intervention is being carried out to curb the increase in volatility and deter speculative yen sales by market participants. For now, the authorities are probably in the stage of closely monitoring the price movement,” Hirofumi Suzuki, head of research group at Sumitomo Mitsui Banking Corporation, told CNBC.
However, the chances of intervention in the short term are still high. “The market’s speculative short JPY position has moved higher beyond levels seen before the Golden Week interventions,” Nomura’s Matsuzawa said.
Following the agreement reached between the USA and Iran, the resolution of the Middle East war and the resumption of shipping through the Strait of Hormuz will help cut the energy import bills of countries such as Japan and reduce exchange rate pressure.
Long-term flows could also become more supportive of the yen as AI-related investments, foreign interest in Japanese stocks and the tech-focused Nikkei rally attract capital to Japan, State Street’s Loo said.
