[Reuters]- The dollar/yen exchange rate is heating up again as the yen has weakened since April and the dollar has strengthened. According to the efforts of the non-commercial (speculation) division of IMM Currency Futures announced by the U.S. Commodity Futures Trading Commission (CFTC), the net short position of the yen has reached its highest level in 17 years, and expectations for a weaker yen are low. Deep-rooted. For this reason, the 155 yen level seems to have been pushed up by speculators.
However, from 2022 onwards, the explanatory power of the Japan-U.S. interest rate differential on the dollar/yen level is high. In particular, the dollar/yen ratio, estimated from the difference in the real long-term interest rate by subtracting the inflation rate (overall, year-on-year rate) from the long-term interest rate, is currently in the 150 yen range. Considering that these estimates are subject to discrepancies of several yen, 155 yen cannot be called an abnormal value as far as the interest rate difference is concerned.
On the other hand, the rate of depreciation against the dollar from 2022 onwards will reach approximately 25%, and only a few emerging market currencies, such as the Argentine peso and Turkish lira, will be able to outperform this.
The yen’s exchange rate, measured in terms of the real effective exchange rate, is also at its lowest since the transition to a floating exchange rate system, and the deviation from the purchasing power parity (vs. the US dollar) calculated by the Organization for Economic Co-operation and Development (OECD) is about 40%. Regardless of whether we look at the price movements after 2022 or the current level, the yen can be evaluated as considerably weaker.
One of the disadvantages of a weaker yen is the deterioration of terms of trade (export price index/import price index). Last year, there was a trade loss of about 11 trillion yen, and real wages have been below the previous year’s level for about two years, mainly due to import inflation.
For Japan, which has a low rate of self-sufficiency in resources and food, a weaker yen will push up the import price index and cause inflation. Curbing import inflation is becoming an urgent priority in order for real wages to turn positive, which the Bank of Japan hopes will happen, and to do so, it is essential to prevent the yen from continuing to fall.
On the 18th of this month, Bank of Japan Governor Kazuo Ueda also mentioned the possibility that the rise in import prices due to the weaker yen would affect the underlying inflation rate, saying, “If the impact is too large to be ignored, monetary policy may be changed.” It’s possible,” he said. The weaker yen is expected to prompt the Bank of Japan to raise interest rates sooner, and the possibility of a rate hike at the April meeting cannot be ruled out. The pace of interest rate hikes is also likely to be faster than market expectations.
However, real interest rates are still expected to remain in negative territory for a long time. Given the current situation where expectations for a US interest rate cut are receding, there is a high level of uncertainty as to how much the Bank of Japan’s interest rate hike will have the effect of suppressing the yen’s depreciation. Overall, it can be said that since the beginning of this month, risks have tilted significantly towards the yen’s depreciation again, and the outlook for the dollar/yen pair’s upside has worsened considerably.
Under these circumstances, this month there have been a series of messages to keep the currency market in check, keeping in mind the recent appreciation of the dollar. In the joint statement of the Japan-U.S.-Korea Finance Ministers’ Meeting, serious concerns were shared over the rapid depreciation of the yen and won. In a joint statement, the Group of Seven (G7) Finance Ministers and Central Bank Governors also reaffirmed the May 2017 joint statement to curb excessive fluctuations and disorderly movements in exchange rates.
Depending on how you look at it, this could be seen as a stepping stone for future collaborative interventions. If we look at history, there have been many cases where the market reversed as a result of coordinated intervention, and if a coordinated intervention to sell the dollar involving Japan, the United States, or multiple countries/regions is carried out, the current depreciation of the yen may end. Looking back at past collaborative interventions, their aims can be broadly divided into two patterns.
First, it is an intervention aimed at correcting the level and movements of the dollar, the key currency. Examples of this are the 1985 Plaza Accord aimed at correcting the dollar’s strength, the Washington G7 statement in April 1995 that hoped for an orderly reversal from the dollar’s weakness, and the concerted dollar-buying intervention in July of the same year (the so-called Tanabata intervention). There is.
Furthermore, multiple media outlets have reported that the preparations were in place for a coordinated dollar-buying intervention in 2009 after the financial crisis. These interventions are thought to be aimed at maintaining the existing framework with the dollar as the reserve currency.
Another pattern is cases in which it is carried out to stop currency depreciation in a specific country or region. For example, in the late 1990s, there was a concerted dollar-selling intervention aimed at suppressing the depreciation of Asian currencies following the Asian currency crisis and the depreciation of the yen caused by the Japan premium problem. Since the beginning of the 2000s, the G7 has coordinated to intervene by purchasing the euro in order to halt the intermittent depreciation of the euro.
What they all have in common is that the local stock market was declining at the same time. These interventions can be summarized as aimed at preventing the acceleration of capital outflows, financial instability, widening current account imbalances, and the strengthening of the dollar.
So, to what extent does the current foreign exchange market situation fit into these two patterns?
First, if we look at the level of the US dollar using the real effective exchange rate (Broad basis) calculated by the Bank for International Settlements (BIS), it is only 4% below the recent high in October 2022, when there were concerns that the strong dollar would have negative effects on emerging economies. It’s pretty close. For this reason, it is important to keep in mind that if the dollar continues to rise, the international community may come together to prevent the dollar from appreciating. However, at the recent G20 (G20) finance ministers and central bank governors meeting, there was no tense discussion about exchange rates, and tensions do not seem to have risen that much.
In addition, although Japan has abolished its negative interest rate policy and long- and short-term interest rate manipulation (yield curve control, YCC), real interest rates are still in negative territory, and strong monetary easing continues with large-scale purchases of government bonds. . From the perspective of the international community, it appears that there is still plenty of room for monetary policy measures to curb the depreciation of the yen.
Unless the yen continues to fall and the situation becomes uncontrollable even with Japan’s unilateral intervention, it is difficult to think that there is a high probability of coordinated intervention by selling the dollar at this point.
Finally, let’s take a look at the dollar trend. Federal Reserve Chairman Jerome Powell, who has been taking a dovish stance, has begun to distance himself from early interest rate cuts, and is likely to take this stance at the Federal Open Market Committee (FOMC) meeting in May. If the Bank of Japan postpones the interest rate hike, it is even more likely that the dollar/yen pair will rise higher.
On the other hand, looking at the 13-week moving average of the “Weekly Economic Index” published by the Dallas Federal Reserve, which can track the U.S. economy on a weekly basis, it is trending slightly downward. The average hourly wage growth in March (year-on-year) was also 4.1%, slowing down from January’s 4.4%. This trend is similar to the decline in the voluntary turnover rate shown in the Atlanta Federal Reserve’s wage tracker, the Employment Dynamics Survey (JOLTS), and there are also signs that wage inflation is slowing down. The market is correcting its excessive expectations for interest rate cuts, and the dollar’s rising momentum is expected to slow down soon, but we must continue to prepare for tense market developments based on data.
Editing: Erika Mune, Kazuhiko Tamaki
(This column was posted on the Reuters Foreign Exchange Forum. It is written based on the author’s personal views)
* Minoru Uchida is a professor at the Faculty of Commerce at Takachiho University, a foreign exchange analyst at FDA Alco Inc., a visiting researcher at the Institute for International Monetary Affairs, a member of the Securities Analyst Journal editorial board, and an official commentator for NewsPicks (Pro Picker). After graduating from Keio University, he joined the Bank of Tokyo (currently Mitsubishi UFJ Bank) and worked in market operations. He has served as chief analyst since 2012, and has been an associate professor at Takachiho University’s Faculty of Commerce since April 2022, and has been in his current position since April 2024. In J-money magazine’s Tokyo foreign exchange market survey, it has been ranked No. 1 in the individual ranking for nine consecutive years since 2013. He is an International Certified Investment Analyst, a Japan Securities Analyst Association Certified Analyst, a Japan Technical Analyst Association Certified Technical Analyst, and a Master of Economics (Kyoto Sangyo University).
*The content such as news, trading prices, data and other information in this document is provided by the columnist for your personal use only and is not provided for commercial purposes. there is no. The content of this document is not intended to solicit or induce any investment activity, and it is not appropriate to use this content for the purpose of making decisions regarding trading or buying or selling. This content does not provide any investment, tax, legal, etc. advice that constitutes investment advice, nor does it make any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document is not intended to replace investment advice from a qualified investment professional. Although Reuters makes reasonable efforts to ensure the reliability of content, any views or opinions provided by columnists are their own and not those of Reuters.
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