Yahoo Finance Yen’s Wild Swings Are Just a Taste of What’s to Come
(Bloomberg) -- On Monday morning, while many in Tokyo enjoyed a public holiday, Yoshio Iguchi was on high alert at Traders Securities Co.’s Shibuya office.
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The already-jittery currency market was primed for official action aimed at reversing the yen’s slide to a more than three-decade low. Friday’s central bank decision had been unexpectedly dovish and was deemed unlikely to change the currency’s course. Yen bears were galvanized, and the Golden Week holiday meant trading would be thin.
The 20-year market veteran was right to be vigilant: At about 10:30 a.m., the yen dropped like a stone.
The plunge to 160 per dollar immediately filled news reports and social media across Japan. “We can’t let our guard down,” Iguchi called repeatedly as trading ensued. Other so-called red-line levels — 155 and 158 — had fallen with no pushback. Some were starting to ask if the authorities would ever act.
Then around lunchtime, a sharp U-turn on trading screens. Within minutes, the yen had strengthened close to 3% against the dollar, more than erasing the day’s move. Speculation ripped across markets that officials had stepped in to prop up their faltering currency for the first time in two years. While any intervention is yet to be confirmed, Bank of Japan accounts suggest it may have spent some 5.5 trillion yen ($35.1 billion) to support the currency.
The manic trading action — Monday became the busiest day for yen spot trading since 2016, according to CME Group — shows how the yen has morphed from a currency once known as one of the “world’s most boring” into one of its most speculated-upon, a victim of Japan’s yawning interest-rate differential with peers across the world. Predictions that authorities will have to repeatedly intervene unless deep structural issues are resolved suggest violent swings may become more frequent, with implications for markets far beyond Japan. In the meantime, the currency’s weakness risks turbocharging a strengthening dollar and destabilizising other Asian currencies.
At the heart of the relentless pressure are expectations about where the BoJ’s interest rates will ultimately land, even after its historic shift away from sub-zero levels in March.
The consensus is that Japan will struggle to catch up with its counterparts. Expectations that the US would ease policy significantly this year have been dashed by a robust American economy and the Federal Reserve’s higher-for-longer rate mantra. Japan’s massive levels of debt — equivalent to more than 250% of the nation’s economy — make narrowing that gap difficult, even at rates more than 500 basis points below the Fed’s. And some officials may be loath to give up too soon a policy that has helped deliver long sought-after inflation.
That will keep local rates far from levels that would tempt investors from the higher yields on offer in the US and other currencies and encourage speculative bets from traders who expect rebounds to be short-lived.
“Over a longer term, a weak yen is probably not a temporary phenomenon,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute and a former central bank official. “Japan might need to accept the reality.”
Some would argue intervention on the currency, which has dropped sharply since the Fed began raising rates in the US in 2022, was long overdue.
While a weak currency generally helps Japanese exporters and boosts inbound tourism, households are under pressure as pay packets fail to keep up with prices in real terms. Faced with the highest inflation in decades, consumers are worried about spending and dissatisfaction with the economy has added to widespread political discontent. This week, the ruling Liberal Democratic Party lost a special election that Prime Minister Fumio Kishida had described in part as a judgment on himself.
Even some of those who initially benefited from a cheaper currency have changed their tunes, as import bills surge and lackluster consumer spending drags on the domestic economy.
The yen is “too weak,” said Masakazu Tokura. He is the head of Keidanren, Japan’s biggest business lobby, whose members include Toyota Motor Corp. The currency is a “big problem,” Japan Airlines Co. Chief Executive Officer Mitsuko Tottori said, adding that she wanted to see it back at about 130 per dollar.
“That roaring from the business world may continue — I think that’s something to watch,” said Charu Chanana, head of FX strategy at Saxo Markets.
While Monday’s sharp rebound brought the yen to 155 per dollar, trading exploded, not least on the 15th floor of TD Securities’ offices at Millenia Tower in Singapore.
“‘It’s going, it’s going, it’s going’, traders were shouting,” said Alex Loo, a currency strategist. “People thought after they didn’t intervene on Friday the coast was clear. But guess what? They came in.”
Yen trading volumes surged to about five times more than normal at Capital.com in Melbourne as everyone scrambled to adjust their positions. By the end of the day, strategist Kyle Rodda had this takeaway for clients: “The rug can still be pulled out from under you at any time, very quickly.”
By Tuesday, the yen was trading at about 157 per dollar, roughly half of its average value in 2012. It’s on track to repeat as the world’s worst-performing major currency this year after sliding more than 10% against the dollar.
The resurgent greenback is already upending global markets thanks to a red-hot US economy and sticky inflation prompting the Fed to hold off cutting rates. A rapidly falling yen risks compounding that effect, raising the ire of other nations worrying about trade imbalances and their own currencies’ exchange rates.
Closer to home, a weaker yen affects Japan’s competitors like South Korea, according to Rajeev De Mello, a 37-year markets veteran and global macro portfolio manager at Gama Asset Management SA in Geneva. It also hinders China in its efforts to keep the yuan stable against the dollar, he said.
Anything that destabilizes China’s managed currency could have an outsized impact, particularly in emerging markets where it is seen as an anchor for regional peers.
“A very weak yen is a big problem for the world,” said De Mello. “If it was weakening within normal realms, I’d be okay. But it’s not okay anymore.”
Adarsh Sinha, co-head of Asia foreign-exchange and rates strategy at Bank of America Corp., doesn’t single out the yen, but acknowledges its role in currency policy around Asia.
“Does the yen’s depreciation matter for their own line in the sand? Yes, they would look at the yen from a trade-weighted component at the margin,” he said. “Yen depreciation does matter but it’s not the only factor.”
Traders seem doubtful that intervention will reverse the weak yen trend.
Even knowing that official action was a real possibility, hedge funds and asset managers supercharged their bearish bets to a record during the week through April 23, according to Commodity Futures Trading Commission data going back to 2006. T. Rowe Price has said the yen could slide to around 170 per dollar.
Renewed attacks against the yen cannot be ruled out as long as economic fundamentals stay unchanged, some market participants say.
“Should investors lose confidence in the yen as a store of value, stealth intervention will no longer be sufficient,” said Simon Harvey, head of foreign-exchange analysis at Monex Europe Ltd. in London. “The Bank of Japan will be forced to address the root cause of the problem.”
--With assistance from Tania Chen and Emily Cadman.
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