The yen rose on Monday, helped by comments from Bank of Japan Governor Kazuo Ueda that left the door open for a near-term rate hike.
Javier Ghersi Time | Getty Images
Japan’s Finance Minister Satsuki Katayama finds himself in an unfavorable position on foreign trade.
After investing more than 11.7 trillion yen ($72.8 billion) in foreign reserves to finance financing from April to May and the Bank of Japan raising policy rates to a more than thirteen-year high, Yen it is still languishing at the 160 level against the dollar.
Masahiko Loo, a fixed-income strategist at State Street Investment Management, said the rate hike was widely expected, making it little more than a “Band-Aid on the yen’s bullet wound.”
In addition, Japanese officials including Katayama signaled several times in early June that Japan was willing to take “decisive action” against excessive yen volatility – ironically, that signal helped reduce the element of surprise, and by extension, the effectiveness of any intervention.
“Policymakers have telegraphed their warning so clearly that an early strike may bring temporary relief,” Loo said.
On April 30, the yen rose sharply to 156.6 from 160.39 against the greenback, prompting speculation that Tokyo had entered the market. The currency strengthened to around 155 the next day, but began to weaken again.
To stem the slide, experts told CNBC that Japan would likely intervene again during Japan’s Golden Week holiday in early May when the yen was around 158. That did not stop the currency, however, from retreating back to the 160 level.
The reason why intervention and rate hikes have not helped reverse the yen’s slide is because of the structural factors that govern the currency.
While the BOJ is tightening policy, Nomura’s chief strategist in market strategy research Naka Matsuzawa said in a note on Wednesday that US bond yields are still high, making the so-called carry trade still attractive.
Carry trades refer to investors borrowing in a low-interest currency, such as the Japanese yen, and investing in high-yielding assets elsewhere.
The harvest on the 10 years of JGBs it is currently at 2.64%, while the 10-year US Treasury yield is at 4.451%. That difference is enough to keep the carry trade going.
Another thing is politics. Matsuzawa said the administration of Prime Minister Sanae Takaichi has a comparative stance, allowing for easy monetary policy to stimulate growth in Japan. And that clouds the policy outlook, to keep capital flows into Japan in check.
Japan’s prime minister in February appointed two academics, reportedly of ill repute, to the BOJ board. Members Toichiro Asada and Ayano Sato are part of a group of reflationists who have promoted the ideas of monetary and fiscal expansion, according to Reuters.
Asada is now on the BOJ’s board, and he voted to end the vote on Tuesday when the central bank raised rates. Sato will replace board member Junko Nakagawa at the end of June.
Japan’s heavy reliance on imported energy while the Iran war has kept prices high has also weighed on the yen, as the country buys dollars to buy energy.
“The FX intervention was carried out to prevent the increase in volatility and to prevent the sale of the yen by market participants. At the moment, the authorities are probably still at the stage of carefully monitoring the price action,” said Hirofumi Suzuki, head of the research group at Sumitomo Mitsui Banking Corporation, told CNBC.
However, in the short term, opportunities for intervention remain abundant. “Short-term JPY speculation in the market has risen significantly, above levels seen before the Golden Week intervention,” Nomura’s Matsuzawa said.
The resolution of the conflict in the Middle East following the agreement between the US and Iran, as well as the resumption of exports through the Strait of Hormuz, will help reduce the energy import debts of countries like Japan and reduce the pressure on the currency.
State Street’s Loo said longer-term flows could also be more supportive of the yen, as AI-related investments, foreign interest in Japanese stocks and a technology-driven Nikkei rally attract capital to Japan.
