Explainer: Why is the Japanese yen so weak?

Japan Post Insurance

11/04/2024 07:34

(Recasts throughout on new 34-year low for the yen)
       SINGAPORE, April 11 (Reuters) - Japan's yen is at
three-decade lows and under enough pressure to prompt strong
official warnings of intervention to prop it up.
    The yen has fallen despite Japan's first interest rate hike
since 2007 and optimism about the economy. It traded at 153.24
per dollar on April 10, its weakest since 1990 and in real terms
it is at its weakest since at least the 1970s.
    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 yen has been
steadily falling for more than three years and has lost about a
third of its value since the start of 2021.
    The yen is also the lowest-rate, or yielding, G10 currency.
That means investors are borrowing it cheaply and selling it to
invest in higher-yielding currencies, driving its price down.
    These deals, known as a "carry trades" are particularly
attractive when broader market volatility  .DBCVIX  is low, as
it is right now, as the fundamental rate difference drives
markets.
    Short-term Japanese rates are held below 0.1% and are not
expected to rise much further.  0#BOJWATCH 
    Short-term U.S. rates are at 5.25-5.5% and a U.S. rate cut
isn't expected until September or November.  FEDWATCH 
    The U.S.-Japan government bond yield gap at the 10-year
tenor is almost 370 bps  JP10US10=RR .
        
  
    RELOAD
    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.
    Yen shorts  1097741NNET , by value, hit a decade high in
April.    
    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 policy shift.
    
    RESPONSE
    The yen's dollar exchange rate has broken the level that
drew intervention in 2022 and markets are on edge about the
potential for government yen buying in support of the currency.
    Finance Minister Shunichi Suzuki pledged "decisive action"
against speculative moves late in March, language that preceded
previous yen-buying intervention. Traders are now focused on the
153 to 155 range as an intervention red zone.
        
  
    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 has tourism 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;))