Explainer: Why has the Japanese yen been so weak?

Japan Post Insurance

29/04/2024 07:04

(.)
       SINGAPORE, April 29 (Reuters) - Japan's yen hit a
three-decade low on Monday before rebounding in a move currency
traders suspected was official intervention.
    Support for the currency follows a years-long slide that
even Japan's first interest rate hike since 2007 and broad
optimism about the economy has failed to arrest.
    In real terms, the yen has been at its weakest since at
least the 1970s. It traded at 160.245 per dollar on April 29
before rising to 155.01 per over a few hours, seemingly without
any news or information in the market.
    A weaker yen is a boon for Japanese exporters' profits, and
for tourists visiting Japan who find their currencies going
further, but it squeezes households by increasing import costs.
    Here are some of the reasons for the slide:
    
    RATES
    Interest rates and momentum are powerful forces in foreign
exchange markets. Both are against the yen. The Bank of Japan
left short-term Japanese interest rates between 0 and 0.1% in
April and did not indicate sharp or sustained rises were coming
up ahead.
        That left the yen the lowest-rate, or yielding, G10
currency and investors are borrowing it cheaply and selling it
to buy higher-yielding currencies, driving its price down.
    These deals, known as a "carry trades" are particularly
attractive when broader market volatility  .DBCVIX  is
relatively low, as it is right now, as the fundamental rate
difference can drive the markets.
    Short-term U.S. rates are at 5.25-5.5% and a U.S. rate cut
isn't expected until November or December.  FEDWATCH 
    The U.S.-Japan government bond yield gap at the 10-year
tenor is about 375 bps  JP10US10=RR .
    
    MOMENTUM
        Why is the yen falling? Because people are selling it.
And why are people selling? Because it is falling. Such can be
the self-fulfilling loop of the market mindset.
    The yen has been steadily sliding for more than three years
and has lost more than one-third of its value since the start of
2021 and few are game to stand in the way.
    The trend discourages exporters from converting foreign
proceeds into yen. It encourages Japanese financial institutions
to invest abroad. And it has been a boon for speculators betting
against the yen, who have not been shy.
        Speculators' short-yen positions  1097741NNET  hit their
largest since 2007 in the week ended April 23.
        
  
        OUTLOOK
        Japan's central bank made a historic shift out of
negative interest rates in March. But the move was so well
advertised, and has not put future sharp hikes on the table,
leaving investors comfortable to add to short yen positions.
    The BOJ's decision to leave policy unchanged at its April
meeting and to offer no fresh hints of hikes seemed to unleash a
new wave of yen selling that drove the currency, briefly, weaker
than 160 per dollar for the first time since 1990.
    The rates picture is also keeping big Japanese investors'
cash abroad, where it can earn better returns.
    Japan Post Bank and Japan Post Insurance, among the largest
financial firms, told Reuters their portfolios won't be
radically changing in response to the BOJ's March shift.
    
    RESPONSE
    The yen rose sharply over a few hours in the Asia daytime on
April 29, leading traders to suspect that after weeks of
threatening to intervene, Japan had stepped in to support its
currency.
        Japan's top currency diplomat Masato Kanda declined to
comment when asked if authorities in Tokyo had intervened. In
any case, the risk of intervention at these levels is high
enough that few wanted to stand in the way of the yen's rebound.
        
  
    REAL TERMS
    A real effective exchange rate index value of 70.25 for the
yen in February is the lowest since the Bank of International
Settlements' records began in 1994 and lower than any of the
Bank of Japan's retrospective projections, which date to 1970.
    That means tourist dollars go further than they have for
generations and that has the tourism industry booming. Japan's
current account has been in surplus for 13 months with help from
tourism income and February's 2.79 million visitors was a record
for the month.
        Domestic consumption, however, has been a weak spot in
Japan's fragile economic recovery as households tend to be net
importers and face higher prices due to a weak yen.
    Beyond Japan, some analysts say the yen's weakness threatens
to erode the competitive advantage of Chinese manufactures, and
speculate it could be behind recent falls in the yuan - though
authorities in China maintain a close grip on the currency.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Bank of Japan scraps radical policy, makes first rate hike in 17
years     urn:newsml:reuters.com:*:nL2N3FW33O
ANALYSIS-Yen carry trade tempts sellers despite BOJ rate hike   
 urn:newsml:reuters.com:*:nL3N3FY0OM
INSIGHT-How the Bank of Japan's plan for a smooth stimulus exit
stumbled     urn:newsml:reuters.com:*:nL3N3FS4OW
ANALYSIS-The BOJ won't sway Japan's trillions of investment
abroad     urn:newsml:reuters.com:*:nL3N3FT1WE
ANALYSIS-Bank of Japan may be less dovish than markets think   
 urn:newsml:reuters.com:*:nL3N3G404X
Yen slide has markets on intervention watch    https://tmsnrt.rs/3VscEv6
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Tom Westbrook; Editing by Shri Navaratnam and
Christopher Cushing and Miral Fahmy)
 ((tom.westbrook@tr.com; +65 6973 8284;))