Source: Golden Ten Data
Author: Yang Dapan

Although the Bank of Japan raised interest rates for the first time in 17 years, the yen exchange rate is still constrained by the US economy. The Japanese government's current efforts to buy time for the troubled yen are easily affected by changes in the prospects for the Fed to cut interest rates.

Friday's US non-farm payrolls data is the next test for Japanese officials, who have been warning traders that they are ready to meddle in the market. If these data further indicate that the US economy is experiencing the impact of high interest rates, then the dollar may test the 152 level against the yen. Some analysts believe this is Japan's bottom line.

After the non-agricultural data is released, the US will release the CPI data next Wednesday. On the same day, Japanese Prime Minister Fumio Kishida will meet with US President Joe Biden in Washington. Since Fumio Kishida's purpose is to show solidarity with Biden, Japan's intervention at this point may make Kishida very embarrassed, but if the yen falls below 152 and the authorities fail to match their words and actions, the yen will continue to depreciate.

Although the yen rose on Thursday due to safe-haven demand, the yen remained at its lowest level in nearly 34 years. The Bank of Japan's first rate hike since 2007 did little to change the market dynamics dominated by the Federal Reserve. Earlier this week, after the US manufacturing data was stronger than expected, bets on US policymakers cutting interest rates at the June meeting once fell below 50%, prompting Japan's Finance Minister Shunichi Suzuki to issue another round of almost undisguised intervention warnings.

Verbal intervention by Japanese officials has become more frequent. US data or comments from Federal Reserve officials have been dragging down the yen, while the Japanese monetary authorities have responded with verbal warnings in an attempt to buy time. The question is how long Japan can endure such an unstable situation. Many economists suggest that the Bank of Japan may need to raise interest rates again sooner than expected.

Daisuke Karakama, chief market economist at Mizuho Bank, said, “A protracted war against the yen seems inevitable, which may heighten market concerns about whether the Bank of Japan will raise interest rates again soon.”

The Japanese authorities have indicated in 2022 that it is not afraid to enter the market to support the yen, when it spent $60 billion to prevent the dollar from breaking through the 152 mark against the yen. Foreign exchange officials argued that the intervention was to deal with excessive fluctuations, not to defend any level.

The weakening yen helped Japan's largest exporters and global-focused businesses achieve record profits, while making Japan an affordable travel destination for foreign tourists. But it has also squeezed the financial position of importers, domestic-focused businesses, and households by driving up investment costs, energy prices, and the strongest inflation in decades.

Given that the yen exchange rate is only about half of what it was 12 years ago, and GDP per capita in dollars is at its lowest level in more than 20 years, policymakers hope that the yen will not weaken further.

The market anticipates that the Bank of Japan's interest rate hike will ease some of the downward pressure on the yen, but Bank of Japan Governor Ueda Kazuo has always emphasized the continued easing of the financial environment, making investors think that the Bank of Japan's next rate hike may be some time away.

As for the factors driving the sharp depreciation of the yen, analysts pointed out the huge spread in interest rates between the US and Japan. The Bank of Japan has capped the benchmark interest rate at 0.1%, which is far lower than the 5.5% currently maintained by the Federal Reserve.

In a few weeks, the Bank of Japan will hold its next policy meeting, and Japan's top monetary official, Masato Kanda, will be on the front line to stop bears. Kanda planned an exchange rate intervention in 2022, and the term “Kanda Ceiling” (“Kanda Ceiling”) is becoming increasingly popular in one corner of Japanese social media, referring to the dollar to yen exchange rate level of 152.

In an interview last week, Kanda said, “Considering fundamental factors such as inflation trends and prospects, as well as the direction of monetary policy and yield in Japan and the US, I strongly believe that the recent sharp depreciation of the yen is unusual. Many people think the yen is currently reversed.”

By the end of February, Japan had 1.15 trillion US dollars in foreign exchange reserves and had enough firepower to enter the market. Goldman Sachs estimates that about $175 billion of this is in dollar funds, and the authorities can use these funds to intervene without selling long-term securities. However, getting the resources needed to buy yen isn't as easy as buying yen.

Tatsuo Yamasaki, a former head of foreign exchange affairs in Japan, said this week that once the dollar rises above the 152 range against the yen, Japan will immediately intervene. Two days before Japan first intervened in the foreign exchange market in 2022, Yamasaki raised the risk of intervention.

After the Bank of Japan's policy change, a survey conducted by foreign media showed that about 54% of respondents believed that due to the weakening yen, there is a risk that the Bank of Japan will raise interest rates further. However, this was not an easy decision because the foundation of the Japanese economy is not stable. Many economists expect Japan's economy to shrink in the first three months of 2024. Karakama said:

“The Japanese economy is not ready for continuous rate hikes, but considering the exchange rate, you cannot completely rule out the possibility of early interest rate hikes.”

Editor/Jeffy