Recently, the exchange rate of the yen against the US dollar has continued to weaken, which has attracted widespread attention in the financial market. Normally, changes in currency exchange rates are closely related to interest spreads on Japanese bonds and US bonds. However, the yen's recent performance has broken this conventional relationship, leaving market participants confused.
Since late April, the spread between 10-year US Treasury yields and 10-year Japanese Treasury yields has narrowed markedly, falling from an annual high of 3.817% on April 25 to 3.256% on Wednesday. According to traditional logic, this should have been enough to stop or even reverse the depreciation of the yen against the US dollar.
However, the opposite is true. The yen continued to weaken, and the USD/JPY exchange rate once broke through the 162 mark on Wednesday, the highest level since December 1986. Despite the subsequent decline in the US dollar, the overall weakness of the yen is still remarkable.
Regarding this anomaly, Apollo's chief economist Torsten Slok told the media:
It's a mystery indeed. Arguably, when Japanese interest rates rise relative to US interest rates, the exchange rate of the dollar against the yen should fall.
According to Slok's calculation, based on the current level of yield, the exchange rate of the yen against the US dollar should be close to 140, rather than the current level of over 160.
Ruben Gargallo Abargues, assistant macroeconomist at KITU, also noticed this anomaly. He pointed out that once the Federal Reserve starts cutting interest rates (expected before the end of 2024), the yen may rebound. Furthermore, large speculative shorting positions in the yen may accelerate the yen's future rebound.
Despite this, some analysts believe that the continued weakening of the yen is reasonable. Marc Chandler, chief market strategist at Bannockburn Global Forex, said that the decline in yen reflects a decline in traders' expectations that the Bank of Japan will reduce the size of treasury bond holdings. Furthermore, the yen exchange rate seems to be more sensitive to changes in US Treasury yields recently.
Notably, the depreciation of the yen appears to have had a positive impact on the Japanese stock market. The blue chip index Nikkei 225 hit a record high of 40913.65 points on Thursday, and the Tokyo Stock Exchange Index is also close to its all-time high.