Source: Securities Times
Author: Chen Xiachang

Over the past 24 hours, the dollar has continuously fallen below the integer marks of 156, 157, and 158 against the yen. International investors are betting heavily on the depreciation of the yen, and it is worth watching when the Japanese government will intervene in the exchange rate.

The Bank of Japan stands idly by while the yen declines at an accelerated pace

Breaking through 155 against the yen was once considered by the market as an important threshold for the Japanese government to intervene, but the Bank of Japan seemed to have no intention of taking action.

On Friday, the Bank of Japan announced its latest interest rate decision during the day to keep the benchmark interest rate at 0-0.1%. Before the resolution was announced, some economists expected the Bank of Japan to release hawkish information to support the yen. However, the Bank of Japan still issued a more dovish statement. The Bank of Japan said it is expected that the current relaxed financial environment will continue, saying “the financial situation has always been relaxed.” If the price trend increases, the degree of monetary easing will be adjusted.

After the announcement of the resolution, the US dollar rose by nearly 50 points against the yen in the short term. The exchange rate of the US dollar against the yen broke 156, and the daily increase reached 0.24%. Meanwhile, EURJPY, GBP/JPY, and AUD/JPY all hit multi-year highs.

After announcing the results of the interest rate meeting, Bank of Japan Governor Kazuo Ueda hardly expressed support for the yen at the press conference.

Kazuo Ueda said he will pay close attention to exchange rate fluctuations and their impact. He said that the exchange rate is an important factor affecting inflation, and if it affects prices, then the exchange rate will be included in policy considerations. However, the current depreciation of the yen has not had a significant impact on core prices, and the weak yen has had a positive impact on demand.

“If the trend of the yen has an impact on the economy and prices that are difficult to ignore, it may become a reason for monetary adjustment policies. Currently, the weak yen has not had a significant impact on potential inflation.” he said.

Compared to Kazuo Ueda, the statement made by Masato Kanda, Japan's Deputy Minister of Finance, who is directly responsible for managing the yen exchange rate, is intriguing.

In a review last week, Masato Kanda said that USD/JPY's 157.6 is a key level worth watching. Earlier, he said that the Ministry of Finance will not sit idly by and ignore the weak yen.

At the beginning of this month, Masato Kanda said in a public speech that excessive exchange rate changes are bad for the economy. “Considering fundamental factors, we are comprehensively judging the trend of the overnight yen. I can't tell you if the trend is excessive.” He said the benefits of a weak yen are diminishing, and the market has fluctuated rapidly recently. Masato Kanda also said, “Some people have benefited, others have been injured, but there is no doubt that the benefits are diminishing. It's no longer necessarily a matter of business benefiting.”

Meanwhile, at the beginning of this month, the finance ministers of the United States, Japan, and South Korea issued a joint statement saying that policy makers are watching the currency market and have agreed to conduct “close consultations.” Japan and South Korea added the phrase “concerned about the depreciation of the national currency” to the statement, highlighting that the two countries are currently facing political pressure brought about by weak exchange rates and increased inflation.

Masato Kanda is believed to be directly responsible for Japan's Ministry of Finance entering the 2022 intervention in the yen exchange rate.

In 2022, Japan's Ministry of Finance spent about 9.2 trillion yen (about 60.6 billion US dollars) to support the yen exchange rate three times. Japan's Ministry of Finance's operation to buy yen was the first time since 1998 that the Japanese government interfered in the foreign exchange market to support the yen exchange rate. Before the Japanese government interfered in the foreign exchange market at the time, the yen exchange rate plummeted to 151.95 yen per dollar. However, the effects of the intervention in the market were immediate. In the last two months of 2022, the exchange rate of the US dollar against the yen fell from 151 to around 127. However, as the Federal Reserve continues to raise interest rates and Japan's ultra-loose monetary policy continues, the yen is going further and further along the path of depreciation. Entering 2023, the yen is once again on the path of depreciation.

Investors are betting big

On the eve of the Bank of Japan meeting, traders increased their short positions in yen. As of Tuesday, hedge funds and asset management companies' bets on the continued depreciation of the yen totaled 184,180 contracts, the highest number of CFTC data since 2006.

Furthermore, according to data from deposit trusts and clearing companies, the rise in demand for sales contracts between the Japanese yen and the US dollar and the euro has driven the yen to a new low this week. On April 24, the total number of options purchased, including the sale of yen at a price of 1 US dollar to 156 yen, reached 300 million US dollars, putting pressure on the yen in the spot market.

Since the beginning of the year, the exchange rate of the Japanese currency against the US dollar has depreciated by nearly 11%, making it the worst performing G10 currency. The factor driving the depreciation was the huge gap between US interest rates and Japanese interest rates. US interest rates reached their highest level in decades after the Federal Reserve's aggressive tightening cycle last year, while Japan's borrowing costs remain stubbornly low near zero.

Charu Chanana, market strategist at Saxo Capital, said: “The Bank of Japan once again proved that its dovish attitude can surprise even Wall Street's most dovish expectations. Once again, we are waiting for intervention measures to stop the yen from plummeting. But no intervention seems to be able to stop the yen from falling at the moment.”

Hirofumi Suzuki, chief monetary strategist at Sumitomo Mitsui Bank, said: “If the yen falls further, just like after the Bank of Japan's September 2022 decision, the possibility of intervention will increase.”

Piotr Matys (Piotr Matys), a foreign exchange analyst at InTouch Capital Markets, believes that the current interest rate hike is more meaningful than foreign exchange intervention. Although he believes this is unlikely to happen, he said, “The most effective way to stabilize a hard-hit currency is to surprise the market by raising interest rates.”

The trade deficit increased, and the number of tourists returned to normal

The depreciation of the yen directly led to an increase in Japan's trade deficit, but at the same time, tourists visiting Japan, especially those from Europe and the US, gradually recovered to before the pandemic.

According to preliminary statistics released by Japan's Ministry of Finance on the 17th, Japan's trade deficit for fiscal year 2023 (April 2023 to March 2024) decreased by about 70% from the previous fiscal year to 5.89 trillion yen (1 US dollar is about 154 yen). This is the third consecutive fiscal year that Japan has had a trade deficit.

According to data, in fiscal year 2023, due to falling energy prices in the international market, Japan's imports decreased by 10.3% to 108.79 trillion yen, the second-highest import value in history after the previous fiscal year; due to strong demand for automobiles in overseas markets, Japan's exports increased 3.7% to 102.9 trillion yen, a record high.

Earlier, media and experts said that the sharp depreciation of the yen is the main reason why Japan continues to have a trade deficit.

In fiscal year 2022, Japan's trade deficit was 21.73 trillion yen due to high energy prices compounded by a sharp depreciation of the yen, the highest since comparable statistics.

At the same time, there has been a marked recovery in visitors to Japan.

According to data recently released by the Japan National Tourism Organization, the number of foreign visitors to Japan in 2023 (estimated value) increased 650% year-on-year to 25.661 million. The number of annual visitors has returned to 80% of the historical peak of 31.88 million in 2019.

An important factor contributing to the rapid recovery in the number of visitors to Japan was the depreciation of the yen. In 2019, before the pandemic, the exchange rate was around 110 yen per dollar, but recently it has hovered around 150 yen. Being able to enjoy delicious food and thoughtful service at a lower price than before the pandemic has made Japan a favorite travel destination for foreign tourists.

Looking at each country and region, South Korea has the highest number of visitors to Japan, with around 6.95 million people. This was followed by Taiwan (about 4.2 million people), mainland China (2.42 million people), Hong Kong, China (2.11 million people), and the United States (2.04 million people). Before the pandemic, mainland Chinese tourists accounted for almost one-third of the total number of visitors. Therefore, the key to achieving the goal of the number of inbound tourists exceeding 2019 by 2025 is the recovery in the number of mainland Chinese tourists.

Editor/jayden