TOKYO, Sept. 29 (Reuters) – With the yen falling to around 150 yen to the dollar, investors are wary of the risk of intervention. However, Japanese authorities may find supporting their currency difficult to achieve and difficult to justify.
Fundamentally, the yen fell 3% in September, to an 11-month low of 149.71 yen on Wednesday, because the Bank of Japan This is a result of Japan’s hesitancy to withdraw from ultra-easy monetary policy.
The dollar-yen pair traditionally tracks the difference in long-term yields between the two countries, which has narrowed to 380 basis points in the dollar’s favor. U.S. Treasury yields soared after Federal Reserve officials surprised markets last week by hinting at further interest rate hikes this year.
On the Japanese side, Bank of Japan Governor Kazuo Ueda quashed expectations of a hawkish shift in the coming months by repeatedly stressing that a patient approach is needed to tighten the reins on ultra-easy policy.
Interventions carry economic risks and political responsibilities. To cause further ripples in the $5 trillion currency market, the Bank of Japan would need to draw down its massive dollar reserves.
Attempts to explain why the Japanese government needed to pump so much money into open markets, given the stance of super-wealthy democracies to let markets determine their exchange rates, prompted a perplexing response from the U.S. government. There is a possibility of receiving.
“The Fed and most of the other G-10 countries are raising interest rates, and the Bank of Japan is emphasizing that it has no intention of doing anything, so if the currency weakens, it makes sense!” State Street・Bert Wakabayashi, Bank & Trust’s Tokyo branch manager, said:
“How can we have a discussion and justify the strong yen in this situation? There’s not much that can be discussed.”
Wakabayashi, like many other analysts and investors, believes that the 150 yen level to the dollar is a red line for currency intervention, as it symbolizes the rising cost of living, especially from imported food and fuel. This is because of its importance. Public opinion is especially important now that there is speculation that Prime Minister Fumio Kishida will call a snap election.
Finance Minister Shunichi Suzuki said Friday that the Ministry of Finance has no “line of defense.”
However, he warned multiple times this month that the Japanese government was watching currency markets “with a sense of urgency” and was “not excluding all options” in responding to “excessive volatility.” I’ve done it.
Masayuki Yoshikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management, said unless Japan’s Ministry of Finance, which controls the currency, protects the yen at 150 yen, market participants will immediately try to push the yen down to 155 yen. To tell.
“There are problems politically and economically,” he said. “Japanese people are dissatisfied with the rising cost of living, and the weaker yen is just one factor, but the most visible one.”
The yen rose to a 32-year low of 151.94 yen in October last year, but was subsequently reined in by several strong interventions by the Japanese authorities, the first in a generation.
But the changing tides at the time were helped by an unexpected cooling in U.S. inflation, which dampened bets that the Fed would tighten further.
Japanese authorities have consistently stressed that their interventions are not aimed at specific levels, but rather aimed at dampening volatility and weeding out speculators, especially when movements are inconsistent with fundamentals. .
At present, it appears that very few of these conditions are met.
Indicators of expected market volatility remain subdued. One-month volatility options fell to a 1-1/2-year low earlier this week after clearing last week’s Fed and Bank of Japan policy meetings.
According to CFTC data, short positions among yen speculators have rebounded significantly from the highs reached in mid-July.
“There’s nothing in terms of price movements that smacks of disorder or over-speculation,” said Ray Attrill, head of foreign exchange strategy at National Australia Bank. “The dollar-yen here is probably too low rather than too high.”
Some analysts argue that fundamentals already point to a 150 point weakness in the yen, and point out that the yen’s depreciation is only being held back by the prospect of intervention and the Bank of Japan moving away from negative interest rates. do.
Against the euro and pound, the yen has actually appreciated this month.
Asked last week whether the U.S. government would understand intervention in the yen, Treasury Secretary Janet Yellen said, “There is a need to smooth out unreasonable fluctuations, but it is not an attempt to influence the level of the exchange rate.” U.S. officials said they generally understood. “It really depends on the details.”
But in the end, taking action is likely to be found to be less costly than doing nothing.
Aninda Mitra, head of Asia macro investment strategy at BNY Mellon Investment Management, said any intervention was “ultimately a political decision”.
“But from a purely economic and financial point of view, I don’t think it will have much of an effect,” Mitra added. “The interest rate differential against the yen is still very large. If it’s so wasteful, why try?”
Report by Kevin Buckland.Additional reporting by Alan John in London Editing by Vidya Ranganathan and Simon Cameron-Moore
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