#日元跌至40年低点 A near 40-year low! Yen "dives"
The Japanese government has adopted a dual approach of rate hikes and intervention, yet the yen exchange rate continues to fall toward a 40-year low. On June 29, the yen oscillated lower against the U.S. dollar, briefly breaking below the 161.96 level, its lowest since December 1986.
Japanese government officials have repeatedly stressed in recent days that they will take appropriate intervention measures against excessive foreign exchange volatility, and the market remains highly vigilant about FX intervention. Looking at past interventions, they have only had short-term effects and failed to reverse the long-term depreciation trend, causing the market to gradually become desensitized to traditional intervention tools. If hopes are pinned on the Bank of Japan, monetary policy adjustments also face the real constraint of fiscal limitations. In this "defense war" for the yen exchange rate, the Bank of Japan is trapped in a situation of "willing to stabilize but unable to turn the tide."
Yen exchange rate falls to 40-year low
In July 2024, the yen fell to 161.96 against the U.S. dollar, triggering foreign exchange intervention by the Japanese government and central bank. This level is also regarded as the "defense line" of the Japanese authorities. Breaking below this level means the yen has hit its lowest since 1986.
Since the beginning of this year, the yen has accumulated a decline of over 3% against the U.S. dollar. To curb the yen's one-way depreciation, the Ministry of Finance carried out a record foreign exchange intervention from April 28 to May 27, spending a total of 11.73 trillion yen.
Short-term market conditions initially gave positive feedback. Market data showed that after the intervention, the yen quickly rebounded to around 155 against the dollar. However, after only about a month, the gains from the intervention were completely erased, and the yen once again fell below the 160 level against the dollar.
Now, the yen keeps falling against the dollar, frequently testing the aforementioned intervention levels, and the market is increasingly focused on the possibility of the Japanese government intervening again. According to recent Japanese media reports, Japanese Finance Minister Satsuki Katayama held an online meeting with U.S. Treasury Secretary Scott Bessent, during which they discussed policy measures to address the yen's historic depreciation, including currency intervention.
However, implementing foreign exchange intervention is also difficult. Zhao Qingming, Vice President of the Foreign Exchange Management Research Institute, believes that against the backdrop of a significantly stronger U.S. dollar, the Japanese government's tolerance for yen depreciation has increased, but it does not rule out the Japanese government looking for opportunities to intervene in the market. Specifically on the level, if the yen falls below the previous low and enters a more undervalued state, the effect of re-intervention may be better.
Zhang Meng, Senior Researcher at Industrial Bank Research, said that the Japanese authorities need to consider costs and rules when intervening in foreign exchange.
According to the IMF's rules for freely floating exchange rate regimes, interventions must not exceed three series in six months, and each series must not exceed three working days. The Japanese authorities may need to sell U.S. Treasuries first, then sell dollars and buy yen in the foreign exchange market, which would cause fluctuations in the U.S. bond market and even global bond markets. Based on this, yen FX intervention will be relatively cautious. First, see if there will be intervention near 162; if not, the next key level is 165.
The key to the exchange rate trend lies in the US-Japan interest rate differential
The huge interest rate differential between the U.S. and Japan is the root cause of the yen's sustained pressure. Currently, the federal funds rate target range remains at 3.50%-3.75%, while expectations for Fed rate hikes continue to heat up, and the dollar index remains at high levels.
On June 16, the Bank of Japan announced a 25 basis point rate hike to 1%, raising the interest rate to a 31-year high. Nevertheless, Japan's current policy rate still has a large gap with the federal funds rate. Xu Jiaqi, an analyst at Golden Credit Rating Research and Development Department, said that the US-Japan interest rate differential remains at a high level, driving global funds to engage in yen carry trades, i.e., borrowing low-cost yen, exchanging it for dollars, and allocating to high-yield dollar assets, thus creating sustained selling pressure on the yen.
Under the enormous yen carry trade, the boost from "rate hikes" to the yen exchange rate is negligible. "This yen depreciation has occurred against the backdrop of the BOJ's rate hike, which also shows that the market lacks confidence in the BOJ's current monetary policy," said Chen Zilei, President of the Shanghai Japan Association and Professor at Shanghai University of International Business and Economics.
Currently, hawkish voices within the Bank of Japan are growing. BOJ board member Naoki Tamura recently called for rate hikes every few months and to gradually push the policy rate toward his estimated 2% neutral rate. However, Japan's government debt-to-GDP ratio ranks first among developed countries, and rapid rate hikes will inevitably increase the fiscal burden.
The market generally expects that the Bank of Japan will maintain a gradual pace of rate hikes.
A CICC research report believes that the BOJ's next rate hike may be around the end of the year, but also needs to watch for the risks of being earlier or later.
Before the US-Japan interest rate differential pattern loosens, the yen's current exchange rate predicament may be difficult to break. In Zhang Meng's view, the yen's appreciation requires a significant trend depreciation of the dollar index, faster rate hikes by the BOJ, or an increase in the overseas exposure hedging ratio by Japanese institutional investors and a unwinding of global carry trades. The first two are currently unlikely, while the key influencing factor for the latter two is the US-Japan interest rate differential.
Xu Jiaqi also believes that a reversal of the yen's long-term trend still depends on whether the US-Japan interest rate differential can substantially narrow and whether carry trades can systematically cool down. In the short term, the yen is likely to remain weak and consolidate. If the Ministry of Finance releases stronger verbal intervention signals, the yen may see a technical rebound. Before the US-Japan interest rate differential substantially narrows, the rebound is more of a trading-level correction and it is difficult to confirm a trend reversal.$USDJPY
The Japanese government has adopted a dual approach of rate hikes and intervention, yet the yen exchange rate continues to fall toward a 40-year low. On June 29, the yen oscillated lower against the U.S. dollar, briefly breaking below the 161.96 level, its lowest since December 1986.
Japanese government officials have repeatedly stressed in recent days that they will take appropriate intervention measures against excessive foreign exchange volatility, and the market remains highly vigilant about FX intervention. Looking at past interventions, they have only had short-term effects and failed to reverse the long-term depreciation trend, causing the market to gradually become desensitized to traditional intervention tools. If hopes are pinned on the Bank of Japan, monetary policy adjustments also face the real constraint of fiscal limitations. In this "defense war" for the yen exchange rate, the Bank of Japan is trapped in a situation of "willing to stabilize but unable to turn the tide."
Yen exchange rate falls to 40-year low
In July 2024, the yen fell to 161.96 against the U.S. dollar, triggering foreign exchange intervention by the Japanese government and central bank. This level is also regarded as the "defense line" of the Japanese authorities. Breaking below this level means the yen has hit its lowest since 1986.
Since the beginning of this year, the yen has accumulated a decline of over 3% against the U.S. dollar. To curb the yen's one-way depreciation, the Ministry of Finance carried out a record foreign exchange intervention from April 28 to May 27, spending a total of 11.73 trillion yen.
Short-term market conditions initially gave positive feedback. Market data showed that after the intervention, the yen quickly rebounded to around 155 against the dollar. However, after only about a month, the gains from the intervention were completely erased, and the yen once again fell below the 160 level against the dollar.
Now, the yen keeps falling against the dollar, frequently testing the aforementioned intervention levels, and the market is increasingly focused on the possibility of the Japanese government intervening again. According to recent Japanese media reports, Japanese Finance Minister Satsuki Katayama held an online meeting with U.S. Treasury Secretary Scott Bessent, during which they discussed policy measures to address the yen's historic depreciation, including currency intervention.
However, implementing foreign exchange intervention is also difficult. Zhao Qingming, Vice President of the Foreign Exchange Management Research Institute, believes that against the backdrop of a significantly stronger U.S. dollar, the Japanese government's tolerance for yen depreciation has increased, but it does not rule out the Japanese government looking for opportunities to intervene in the market. Specifically on the level, if the yen falls below the previous low and enters a more undervalued state, the effect of re-intervention may be better.
Zhang Meng, Senior Researcher at Industrial Bank Research, said that the Japanese authorities need to consider costs and rules when intervening in foreign exchange.
According to the IMF's rules for freely floating exchange rate regimes, interventions must not exceed three series in six months, and each series must not exceed three working days. The Japanese authorities may need to sell U.S. Treasuries first, then sell dollars and buy yen in the foreign exchange market, which would cause fluctuations in the U.S. bond market and even global bond markets. Based on this, yen FX intervention will be relatively cautious. First, see if there will be intervention near 162; if not, the next key level is 165.
The key to the exchange rate trend lies in the US-Japan interest rate differential
The huge interest rate differential between the U.S. and Japan is the root cause of the yen's sustained pressure. Currently, the federal funds rate target range remains at 3.50%-3.75%, while expectations for Fed rate hikes continue to heat up, and the dollar index remains at high levels.
On June 16, the Bank of Japan announced a 25 basis point rate hike to 1%, raising the interest rate to a 31-year high. Nevertheless, Japan's current policy rate still has a large gap with the federal funds rate. Xu Jiaqi, an analyst at Golden Credit Rating Research and Development Department, said that the US-Japan interest rate differential remains at a high level, driving global funds to engage in yen carry trades, i.e., borrowing low-cost yen, exchanging it for dollars, and allocating to high-yield dollar assets, thus creating sustained selling pressure on the yen.
Under the enormous yen carry trade, the boost from "rate hikes" to the yen exchange rate is negligible. "This yen depreciation has occurred against the backdrop of the BOJ's rate hike, which also shows that the market lacks confidence in the BOJ's current monetary policy," said Chen Zilei, President of the Shanghai Japan Association and Professor at Shanghai University of International Business and Economics.
Currently, hawkish voices within the Bank of Japan are growing. BOJ board member Naoki Tamura recently called for rate hikes every few months and to gradually push the policy rate toward his estimated 2% neutral rate. However, Japan's government debt-to-GDP ratio ranks first among developed countries, and rapid rate hikes will inevitably increase the fiscal burden.
The market generally expects that the Bank of Japan will maintain a gradual pace of rate hikes.
A CICC research report believes that the BOJ's next rate hike may be around the end of the year, but also needs to watch for the risks of being earlier or later.
Before the US-Japan interest rate differential pattern loosens, the yen's current exchange rate predicament may be difficult to break. In Zhang Meng's view, the yen's appreciation requires a significant trend depreciation of the dollar index, faster rate hikes by the BOJ, or an increase in the overseas exposure hedging ratio by Japanese institutional investors and a unwinding of global carry trades. The first two are currently unlikely, while the key influencing factor for the latter two is the US-Japan interest rate differential.
Xu Jiaqi also believes that a reversal of the yen's long-term trend still depends on whether the US-Japan interest rate differential can substantially narrow and whether carry trades can systematically cool down. In the short term, the yen is likely to remain weak and consolidate. If the Ministry of Finance releases stronger verbal intervention signals, the yen may see a technical rebound. Before the US-Japan interest rate differential substantially narrows, the rebound is more of a trading-level correction and it is difficult to confirm a trend reversal.$USDJPY
