Author: Carter Johnson, Anya Andrianova, Bloomberg; Translated by Tao Zhu, Golden Finance
As the yen plunges to milestone levels in rapid succession, Japanese authorities face a stark reality: the slide won’t stop unless the Federal Reserve eases its long-running policy path. They have no control over it.
Investors around the world are aware of this as they analyze how still-high U.S. borrowing costs are boosting the dollar and its impact on the rest of the world. The yen’s continued plunge is an extreme example of U.S. financial dominance in the $7.5 trillion global currency market that trades daily.
“This is all about the Fed. Long-term higher means keeping the front end of rates very high, attracting capital into the U.S. and keeping the dollar strong,” said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC. For Japan, “it’s a problem.”
The Fed’s high interest rates have reverberated in the foreign exchange market, with many major currencies weakening against the dollar this year due to interest rate differentials.
The United States’ dominance of global financial markets was on full display Wednesday. A key measure of the dollar closed at a year-to-date high, weighing on other currencies around the world. U.S. stocks were on track for another strong quarter, while the Treasury Department had no trouble finding buyers for its auction of $70 billion in notes.
It was a different story for the yen, which fell 0.7% to 160.87 yen against the dollar, surpassing the level at which officials intervened in the market in April. The yen fell to an all-time low of 171.80 against the euro. Amid the moves, Japan’s top monetary official, Masato Kanda, reiterated that authorities were urgently considering the foreign exchange market and would take appropriate measures as needed.
The problem is that efforts by Tokyo officials to prop up the yen have so far failed to make headway. The yen has continued to weaken in the weeks since Asian countries spent a record 9.8 trillion yen (more than $60 billion) on foreign exchange markets, and further intervention is likely to be equally ineffective, strategists say.
“Until the Fed actually eases monetary policy, I don’t think these measures are going to have any effect,” said Bob Savage, head of market strategy and insights at BNY Mellon Capital Markets. “In the big picture, you have to reduce Japanese demand for dollars. You either have to get long-term rates high enough or U.S. rates low enough. Neither of those things is happening.”
Asset managers have been heavily shorting the yen, with last week’s reading being the most bearish since 2006, Commodity Futures Trading Commission data showed on Monday.
The huge interest rate gap between Japan, where borrowing costs remain close to zero, and the United States has been the main driver of the yen's decline this year.
Things didn’t go as expected. At the beginning of the year, traders expected the Federal Reserve to initiate a series of rate cuts, leading the global easing trend of major central banks, while the Bank of Japan would go the other way and break its ultra-low interest rate policy. Instead, a strong US economy and sticky inflation kept the Fed on hold, while the Bank of Japan raised rates slightly.
“The yen was supposed to rise this year as Japanese interest rates rose,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. But now, “the wait continues,” she said.
The next big catalyst for the yen is now the release of the Fed’s preferred U.S. inflation gauge on Friday. Economists expect core personal consumption expenditures inflation, a measure that excludes the volatile food and energy categories, to slow, which could support the Fed’s efforts to lower borrowing costs this year.
Japan faces a lot of risks. Citigroup estimates that the country has $200 billion to $300 billion to finance any further intervention, which would require selling dollars and other currencies held in its cash reserves and even selling government bonds around the world to buy yen.
What Bloomberg Strategists Say…
“A breakout above 163 yen this week could be a boon for the Japanese Ministry of Finance as it would push realized volatility above 10% and give the pair a gain of around 10 yen from the May 16 low.”
— Vassilis Karamanis, FX Strategist
For Dominic Konstam, any intervention is more about “slowing down the process of an eventual bottoming of the yen” as the Bank of Japan normalizes monetary policy.
“The problem they face is that their intervention is misguided,” said Steve Schmidt, head of macro strategy at Mizuho Securities USA, on Wednesday. “They have limited reserves, and they can’t spend hundreds of billions of dollars to defend the currency.”
