Source: Broker China
The Bank of Japan has taken action.
This morning, the Bank of Japan's latest operation came as a surprise to the market. On May 13, local time, the Bank of Japan cut down on bond purchases, and the Bank of Japan will reduce the purchase amount of 5 to 10-year Japanese treasury bonds from 475 billion yen to 425 billion yen. This move has increased the market's expectations that the Bank of Japan will take monetary policy action.
Notably, hedge funds are drastically cutting short bets on yen. According to the latest data released by the US Commodity Futures Trading Commission, as of last Tuesday, international leveraged investors held more than 81,000 contracts relating to betting that the yen would fall, a decrease of nearly 27,000 shares from the previous week. This is the biggest decline since more than four years ago.
Does this mean that this wave of ferocious depreciation of the yen has come to an end?
Move suddenly
Faced with the crazy depreciation of the yen, the Bank of Japan finally took action.
On May 13, local time, the amount of Bank of Japan bond purchases was reduced compared to the previous operation. The Bank of Japan will reduce the purchase amount of 5 to 10-year Japanese treasury bonds from 475 billion yen to 425 billion yen, a reduction of 50 billion yen.
This move has increased the market's expectations that the Bank of Japan will take monetary policy action. Affected by this, the yen exchange rate rose more than 40 points in a straight line at one point, then the increase narrowed rapidly.
Not long ago, Bank of Japan Governor Kazuo Ueda warned that if the trend of yen has a significant impact on inflation, the central bank may take monetary policy actions to further warn of the impact of the recent sharp decline in yen on the economy.
Since this year, the yen has been violently sold off. At one point, the US dollar exchange rate rose above the 160 mark, and the yen exchange rate depreciated by more than 10% during the year.
In fact, the Japanese authorities' operation to “save the yen” has already begun.
The latest data from the Federal Reserve's various accounts suggests that Japanese policymakers may have further funded intervention in the foreign exchange market to boost the troubled yen. According to data as of May 8, the US securities assets held by major central banks decreased by about 10.6 billion US dollars, and the total holdings were 2.95 trillion US dollars.
The data showing cash loss covers a week in which Japanese policymakers may have interfered in the foreign exchange market to support the yen. Another cash account balance used by Bank of Japan officials decreased by 17.8 billion dollars, indicating that these funds may be used to support the yen at some point.
Although Japan's Ministry of Finance has not confirmed the intervention so far, the agency's analysis of the Bank of Japan accounts shows that the intervention did occur.
Foreign media analysis of the Bank of Japan's current account shows that the Japanese authorities may have entered the market twice. According to the latest data and estimates from currency brokers, the first intervention was 6.2 trillion yen, and the second time was 3.2 trillion yen.
According to the latest data released by Japan's Ministry of Finance, as of the end of April this year, the value of Japan's foreign exchange reserves was about 1.14 trillion US dollars, a decrease of 14.2 billion US dollars from the previous month.
Masafumi Yamamoto, chief foreign exchange strategist at Mizuho Securities, said that in terms of estimating the scale of intervention, it is better to analyze the Bank of Japan's current account data than analyzing foreign exchange reserves. Foreign exchange reserves have received less attention recently because they are affected by various factors, including fluctuations in the exchange rate of non-US dollar currencies and changes in the market value of securities held.
Short positions plummeted
After the Japanese authorities “bailed out the market,” hedge funds drastically cut short bets on the yen, the biggest decline since March 2020.
According to the latest data released by the US Commodity Futures Trading Commission (CFTC), as of last Tuesday, international leveraged investors held more than 81,000 contracts relating to betting that the yen would fall, a decrease of nearly 27,000 from the previous week. This is the biggest decline since more than four years ago.
However, institutions are still pessimistic about the yen's future. Brad Bechtel, head of global foreign exchange at Jefferies Financial Group, said that the Japanese authorities' intervention has driven out short-term traders, but the wider market is still bearish on the yen.
Alvin Tan, head of Asian foreign exchange strategy at RBC Capital Markets in Singapore, believes that the yen may fall to 160 due to the “huge” spread between the US and Japan. If US interest rates do not fall, “the impact of the Japanese authorities' intervention will soon dissipate,” and the USD/JPY exchange rate will retest the 160 level.
The Bank of America expects the Federal Reserve to cut interest rates in December, and it predicts that the yen will once again hit the 160 level this year. Shusuke Yamada, head of Japanese currency and interest rate strategy at Bank of America Securities Japan, said, “Considering that there may not be any signs of interest rate cuts until September, the pressure to depreciate the yen will continue for more than a quarter.”
According to options traders, after a few days of suspected intervention by the Japanese authorities, leveraged funds began betting again that the USD/JPY exchange rate would return to 160 points within the next few weeks.
“Mrs. Watanabe” has taken action
At the same time, it appears that the Japanese are also “shorting” the yen in a big way.
Citibank said in its latest report that household savings in Japan are showing a steady shift towards investment, which has an important impact on the trend of the yen.
The report shows that the status of yen cash and deposits as assets in the minds of Japanese people is changing. According to the report data, at the end of the third quarter of FY2024, household savings cash experienced the first month-on-month decline since the third quarter of FY2012.
The report said that Japan's “Mrs. Watanabe” is increasingly turning yen deposits into risky assets.
Since some retail investors in Japan are housewives who are in charge of household finances, the market cleverly gave them the code name Mrs. Watanabe (Watanabe is now the fifth largest surname in Japan; about 1.08 million Japanese surnames are “Watanabe”).
Since “Mrs. Watanabe” generally experienced the transition process from peak to extreme decline in the bubble era, she has a stronger sense of risk aversion.
Over the past 25 years of deflation, “Mrs. Watanabe” preferred to hold cash savings. As of the third quarter of 2023, financial assets held by Japanese households exceeded 2120 trillion yen (about 14 trillion US dollars), of which 52.5% were cash and deposits (about 7.35 trillion US dollars).
However, this trend seems to be changing. According to the Hana Report, foreign currency deposits and foreign securities investments in trust funds held by Japanese households have shown a marked increase in foreign currency-denominated assets, and the weight has basically remained stable.
The report said that due to the huge size of deposit funds, under this investment trend, a significant portion of Japanese capital will flow into foreign securities investment.
The report bluntly stated that even if only 1% of total assets flowed into foreign currency, it would mean that more than 20 trillion yen (approximately RMB 928.8 billion) would be sold off, further exacerbating the weakening of the yen.
According to the report, the market has now reached a consensus that the yen will remain weak for a period of time. Citi expects the yen to remain around 155.
editor/tolk