The yen weakened again on Wednesday, approaching the critical 1 dollar to 160 yen threshold. This follows a rare joint intervention by the United States and Japan, which bought yen and initially pushed the currency significantly higher from near four-decade lows. However, as some of those gains have been given back, the market is once again on alert for the possibility of further intervention by US and Japanese authorities.
At the close of New York trading on Wednesday, the yen was down about 0.1% against the dollar, trading at 159.43 yen per dollar. Since the start of August, the yen has depreciated by over 1%, erasing some of the gains made following the joint US-Japan intervention earlier this month. When that coordinated yen-buying operation occurred, the yen was near 164 to the dollar, close to its lowest level in forty years. This was a rare instance of coordinated action by the US and Japan to support the yen in many years.
However, with the interest rate differential between the US and Japan remaining significant, the lasting effect of the foreign exchange intervention has been limited. After a brief period of strength, the yen has fallen back and is now approaching the 160 level. Over the past period, this area has been a key level that the market watches to gauge the potential for Japanese authorities to intervene in the market.
Nathan Thooft of Manulife Investment Management said it would be "premature" to think the threat of intervention has disappeared. The Japanese government has already shown a willingness to act, even coordinating with the US Treasury, so traders will inevitably be more cautious if the exchange rate approaches or breaks through the recent intervention zone again. Thooft stated, "We are definitely still in intervention watch territory."
Shusuke Yamada, a strategist at Bank of America, pointed out that the joint US-Japan intervention initially boosted market confidence in Japan's resolve to defend the yen. But with the dollar-yen rising again over the past week without official action, this policy deterrence seems to have weakened somewhat.
A fundamental reason for the continued pressure on the yen remains the large interest rate gap between the US and Japan. The Bank of Japan's benchmark rate is currently 1%, compared to the Federal Reserve's federal funds rate target range of 3.5% to 3.75%. The higher dollar interest rates continue to make dollar-denominated assets more attractive to investors, putting pressure on the yen.
The market currently estimates about a 60% probability that the Bank of Japan will raise rates in September, and has fully priced in a rate hike by October. Meanwhile, traders see a higher likelihood of the Fed cutting rates again before December this year. Against this backdrop, market participants believe that relying solely on occasional foreign exchange intervention is unlikely to fundamentally reverse the yen's trend. The pace of the Bank of Japan's future monetary policy tightening will be the key factor determining whether the yen can stage a sustainable rebound.
Strategist Brendan Fagan noted that for the yen to achieve a more sustainable appreciation, it will ultimately depend on the pace of the Bank of Japan's monetary policy tightening, rather than sporadic market intervention. The shortening time intervals between the Bank of Japan's rate hikes are an important sign of a gradual change in Japan's policy response mechanism.
The market's next focus will be on Thursday's release of Japan's July Producer Price Index (PPI) for further clues on the Bank of Japan's future policy path. Economists surveyed expect Japan's July producer price index to rise 7.4% year-on-year, accelerating from June's 7.1% increase. The June growth rate of 7.1% was already the fastest since 2023.
Stefan Grothaus of DZ Bank suggested that the yen's persistent weakness this year has likely been a significant factor driving up Japanese producer prices. If the yen's depreciation further increases import costs and inflationary pressures, the resulting stronger expectations for a Bank of Japan rate hike could, in turn, provide some support for the yen.
Therefore, with the dollar-yen again approaching the 160 level, the market faces two policy tracks. In the short term, traders will be highly focused on whether US and Japanese authorities will intervene again in the foreign exchange market. Looking further ahead, whether the Bank of Japan can accelerate the pace of rate hikes and narrow the US-Japan interest rate differential may be the key to determining whether the yen can truly break free from its long-term depreciation pressure.
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