On Monday, October 2, the Japanese yen (USD/JPY) slid further towards the 150-per-dollar mark, reaching fresh 11-month lows. The currency’s depreciation has raised concerns about potential government intervention, leading Finance Minister Shunichi Suzuki to comment that he was watching currency movements “with a strong sense of urgency.” Suzuki declined to comment whether intervention was possible at this point.
The yen has seen significant depreciation this year as the the Bank of Japan (BoJ) has maintained its commitment to an ultra-easy monetary policy, while other major central banks have pursued aggressive tightening measures.
At its September meeting, the BoJ dashed hopes of signaling an end to its negative interest rate policy by sticking to its dovish stance.
A summary of opinions from the BoJ’s recent meeting indicated that policymakers discussed various factors to consider when exiting the ultra-loose policy. On a more positive note, data revealed a notable improvement in sentiment among Japanese companies during the third quarter, fostering optimism about the economic outlook.
Markets.com Chief Market Analyst Neil Wilson summarised the dynamics in his round-up of market events on Monday:
“BoJ moves incoming? Japan’s Tankan survey showed sentiment among the country’s biggest manufacturers rose to 9 in September, versus 5 last time. Cconfidence among non-manufacturers rose to 27, the highest since December 1991. USDJPY is heading to 150 this morning, touching 149.8 after more unscheduled bond buying operations — ready to run the stops post 150 or hit a wall of BoJ intervention? The BoJ’s Summary of Opinions from its September meeting saw some members setting out conditions and possible timing for a future exit from ultra-loose policy.”
Analysts were mostly bearish on the Japanese currency in their yen forecasts. Rabobank’s USDJPY outlook had the dollar to yen pair trading above 145 in the next six months:
“While fears of FX intervention will be adding to psychological resistance at the USD/JPY 150 level, USD strength suggests upside risks remain in the currency pair near-term.
While we can not rule out a little further normalisation in BoJ policy in the coming months, the scope and pace are almost certainly set to remain cautious. Given our view that broad-based USD strength will sustain into 2024, we see risk that USD/JPY could hold above 145 on a six-month view barring any major surprise from the BoJ.”
Last week, analysts at Frankfurt-headquartered Commerzbank wrote:
“If JPY were to depreciate further, it is quite possible that there will be further interventions. These are unlikely to have much of an effect though. Since the BoJ does not want to move away from its ultra-expansionary monetary policy despite comparatively high inflation rates, a weaker JPY seems fundamentally justified.
A weaker USD would improve the situation, but at present the market seems to be betting on a stronger USD. The solid US economy and hawkish comments by Fed members support USD at present. Everything all told, there is a lot pointing towards higher levels in USD/JPY.”
Rumors of monetary tightening by the BoJ have so far proven exaggerated — which is a good thing for Japanese stocks, according to a recent piece by Barron’s reporter Craig Mellow.
A weakening currency typically has a negative impact on equities in most places. However, Japan's market is primarily controlled by exporters such as Toyota Motor, Sony Group, and industrial equipment leader Keyence. These companies have thrived as the depreciating yen coincided with stronger-than-anticipated demand in the United States and Europe.
This is one of the factors contributing to the impressive performance of the export-focused Nikkei 225 stock average, which has surged by 27% since the beginning of the year. This notable growth has far outpaced the performance of the Dow Jones (USA30) and S&P 500 indices (USA500) in the United States.
Japan has entered a favorable macroeconomic situation, according to Aaron Hurd, the senior currency portfolio manager at State Street Global Advisors. With the exception of oil, declining prices for most imported commodities help alleviate some of the impact of a historically weak yen. Prime Minister Fumio Kishida's administration is getting ready to provide subsidies to offset consumers' fuel expenses, a move made possible by the government's ability to borrow at an interest rate of less than 1% per annum.
A recession in the U.S. would dampen Japanese exports, but likely spur Federal Reserve rate cuts that would bolster the yen.
Hurd believes the yen may be in line for a successful year in 2024, provided it depreciates in the near future:
“The yen could easily be the best-performing currency in the G10 next year, if it goes to 155 to 158 [to the dollar] first.”
Long-term, however, analysts see the yen weaker against the dollar. The interest rate gap between the persistently hawkish U.S. Federal Reserve and the enduringly ultra-dovish Bank of Japan, provides limited near-term grounds for anticipating a resurgence of the yen.
“The structural factors for yen weakness are still likely to continue in the long term,” JPMorgan economist and head of Japan markets research Tohru Sasaki recently told the Financial Times. “Even if the yen has ups and downs due to cyclical factors, the yen is likely to maintain a depreciation trend in the years to come.”
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