Source: Wall Street See

After 24 hours of intense trading, the yen recorded its best monthly performance in more than a year and a half. On Thursday, the yen against the US dollar rose above the 149 mark and climbed to its highest level since March. In terms of product structure, the operating income of products ranging from 10 to 30 billion yuan was 401/1288/60 million yuan, respectively.

However, the yen's strength severely dragged down the domestic stock market. On Thursday, the Japanese TOPIX index saw its largest intraday drop since 2020, while the central bank's rate hike took a toll on real estate stocks.

The Bank of Japan unexpectedly raised interest rates on Wednesday, and the Federal Reserve indicated that it would begin lowering rates in September at the earliest. The expectation of the narrowing of the interest rate differential between the US and Japan has refocused the market on the yen. Amundi and TD Securities predict that the exchange rate of the yen against the US dollar may rise to 140.

The double blow of the central bank's interest rate hike and the sharp rise of the yen has caused the Japanese stock market to suffer the "largest drop in four years", with all sectors falling.

On Thursday, August 1, the Japanese TOPIX index fell 3.9% at one point, the largest intraday drop since April 2020, with all sectors falling. Real estate stocks fell 8.1% at one point, auto stocks fell 6.4%, and department stores, which had benefited from the fall in the yen and the surge in tourist consumption, lost steam.

The Nikkei 225 index fell 3.5% at one point in intraday trading and narrowed its decline to 2.5% at the close of trading. The index entered a technical correction last week.

"The Bank of Japan's interest rate hike raises two concerns: one is that the appreciation of the yen is a hindrance for exporters who have benefited from the depreciation of the yen; and two is whether the economy can maintain its strength," said Tetsuo Seshimo, portfolio manager at Saison Asset Management Co. "There are still many unknown factors."

As Japanese companies increase their quarterly profit announcements, corporate profits are also putting pressure on the stock market. Toyota, Japan's largest market-cap company, contributed the most to the decline in the TOPIX index, with its stock price falling as much as 8.5% as second-quarter operating profit fell short of expectations.

At Wednesday's monetary policy press conference, Bank of Japan Governor Haruhiko Kuroda "turned hawkish," saying that if economic and inflationary support continues, the 0.5% rate is not a specific upper limit.

"Kuroda's performance at yesterday's press conference was like a different person, and his attitude became hawkish. The assumption that 'interest rates will not rise and the yen will not appreciate' in the Japanese stock market has already changed," said Tomoichiro Kubota, senior market analyst at Matsui Securities.

Due to the huge shift in the Bank of Japan and the Federal Reserve, Wall Street has rapidly turned bullish on the yen. Macquarie Group analysts said, "The strong upward momentum of the yen has just begun." By the end of this year, the USD/JPY exchange rate may approach 140, and by December 2025, it will soar to 125. This will bring the yen to the exchange rate level it had in early 2022 when the Fed had just begun raising interest rates.

Most of the market is bullish on the yen again as it becomes the focus of attention.

Alex Loo, a macro strategist at TD Securities, said: "The BOJ's tightening of monetary policy will strengthen the feedback loop on local asset re-allocation." He expects the yen against the US dollar to rise to 140 in the first quarter of next year.

"If the Fed begins a cycle of easing, risk aversion rises, and the Bank of Japan maintains a firm tightening stance, the (yen-dollar) exchange rate could rise to 140," said Paresh Upadhyaya, head of US fixed income and currency strategy at Amundi. "Although this seems to be a daunting obstacle, it is not."

After surging nearly 2% on Wednesday, the USDJPY rose 1% to 148.51 on Thursday, with gains of more than 7% in the past month.

In the first half of this year, the US-Japan interest rate differential caused the yen to plummet 12%, hitting its lowest point in 38 years in early July. It was the worst-performing currency in the G10 group, prompting Japan to intervene to support the yen in April and May.

"The BOJ's tightening of monetary policy will strengthen the feedback loop on local asset re-allocation," said Alex Loo, a macro strategist at TD Securities. He expects the yen against the US dollar to rise to 140 in the first quarter of next year.

Christopher Wong, foreign exchange strategist at OCBC Bank, is also very bullish, believing that the fair exchange rate for USD/JPY is 136.

Charu Chanana, head of forex strategy at Singapore-based Standard Chartered, believes there is room for the yen to appreciate to below 145 this year, especially with increased volatility and short covering.

Shusuke Yamada, senior foreign exchange and interest rate strategist at Bank of America Merrill Lynch in Tokyo, said the Federal Reserve is expected to cut interest rates, and the Bank of Japan is expected to raise interest rates to 0.75% next year, which will push the yen to trade around 140.

Strategist Sebastian Boyd said, "If the only pressure on the yen is the expected interest rates of the United States and Japan, then the yen is still cheap. The yen has more room to rise from its current level, and the model shows that the yen should be much stronger than it is now."

It's worth noting that not everyone is bullish on the yen.

Tohru Sasaki, chief strategist at Fukuoka Financial Group, warns that although the yen may rise in the short term, when the market shifts its focus back to interest rate differentials and economic fundamentals, the yen may fall back to the 160 level again.

Sasaki said, "If the real interest rate remains significantly negative and does not turn positive, I think the yen will be difficult to appreciate even in the medium to long term."

Editor / jayden