The yen sold off against the dollar in New York trading Wednesday after the latest U.S. inflation data, creating the potential for the Japanese government to intervene as it did in 2022 to halt the decline.
The Japanese currency weakened to more than 153 yen versus the dollar, a level not seen since 1990.
On Thursday morning in Tokyo, Japan’s top currency diplomat Masato Kanda told reporters that recent yen moves were “rapid.” Kanda, the vice finance minister for international affairs, said authorities will “respond appropriately to excessive moves, without ruling out any option.” The dollar stood around 152.80-152.90 yen in early morning trade.
The latest dip in the yen comes after the much-anticipated U.S. consumer price index for March showed a 3.5% year-on-year increase, which followed a robust employment report on Friday. Economists expected a 3.4% increase.
As more signs point to a strong U.S. economy, market expectations are waning for the Federal Reserve to start cutting interest rates in June.
The U.S.’s economic resilience and the large yield gap Japan has with the U.S. and other advanced economies are working against the yen despite the Bank of Japan’s rate hike last month.
Japan’s central bank has also ended its yield curve control program, which was used to buy large quantities of Japanese government bonds to keep their rates near zero. But with the yen threatening the 152 barrier, the BOJ on Monday signaled it would continue buying large amounts of JGBs.
Japanese Finance Minister Shunichi Suzuki and other monetary officials have repeatedly talked up the currency, saying they are ready to take necessary measures to stop the yen’s fall.
In 2022, the Finance Ministry bought 9.2 trillion yen, selling the dollar, when the Japanese currency neared 152.
The potential for another round of dollar selling might be near. Nomura Securities has said it sees the possibility of government intervention when the yen surpasses 152. Bank of America Securities expects a greater chance of yen buying between 152 and 155, and Invesco says intervention becomes more of a possibility when the yen slides toward 155.
“We are readying ourselves for a move towards 155 before intervention risks rather than just jawboning,” said Amarjit Sahota, executive director of foreign exchange advisory firm Klarity FX.
If the Japanese currency breaks through the 152 barrier, it is expected to accelerate at a fast pace toward 155, said Ryota Abe, an economist in the global markets and treasury division of Sumitomo Mitsui Banking Corp. in Singapore.
This “will cause Japanese authorities to become more sensitive about the FX rate,” he said.
Traders could look to 160 in the unlikely scenario that the Japanese government does not intervene, Abe said.
The BOJ has “more than enough room” to boost the yen as it did in 2022, Goldman Sachs FX analysts wrote on March 29.
Their calculations show the BOJ would have around $175 billion worth of dollar-denominated reserves available for an initial intervention.
But “we caution that the impact would likely be limited,” they wrote.
“Intervention is most effective when it aligns with the broader macro picture, involves cross-country coordination, and catches markets off-guard,” they wrote. “That is not the case now.”
Following Wednesday’s inflation data, investors are now expecting only two Fed rate cuts in 2024, according to the CME FedWatch tool, which tracks prices of federal funds rate futures. Chances of a 25-basis-point cut in June have fallen to around 16%, down from a 56% outlook just one day ago.
Yujiro Goto, head of foreign exchange strategy at Nomura Securities, said the yen strengthened by about 5 to the dollar on the day of the three previous government interventions, one of which came in September 2022 and two the following month. The yen traded below its pre-intervention highs for at least 10 business days before diverging. The currency weakened when the U.S. economy was buoyant and vice versa.
After the first intervention, the yen resumed its descent after strong U.S. economic data pushed up U.S. Treasury yields. The currency eventually weakened to a point beyond where the Japanese government had stepped in, he said.
The two October interventions “in hindsight, succeeded in changing the trend of USD/JPY for at least several months, not just weeks,” Goto said, attributing that trend to signs of a slowdown in the U.S. economy.
In the next year or two, the yen will likely rally 10% to 15% against the greenback primarily due to a smaller gap in interest rates between the U.S. and Japan, according to Kensuke Niihara, chief investment officer for Japan at State Street Global Advisors.
David Chao, global market strategist at Invesco, said in the long term he expects the yen to be supported by structural factors, such as Japan’s current account, which in February logged its 13th consecutive monthly surplus. – NikkeiAsia
