BlackRock's top fixed-income strategist argues that currency intervention alone cannot rescue the yen; the Bank of Japan must deliver a clear hawkish policy signal.
The yen has once again approached the 160 level against the U.S. dollar this week, hovering near a four-decade low. This has partially erased gains from coordinated U.S.-Japan market intervention, underscoring the limits of such measures when interest rate differentials overwhelmingly favor the dollar.
Rick Rieder, Global Chief Investment Officer of Fixed Income at BlackRock, stated on Wednesday that foreign exchange intervention is "not the most sustainable path" for a yen rebound. "I've seen multiple intervention actions—you need to keep deploying significant firepower. But the key is that monetary policy must convince the market you will raise rates, showing a hawkish stance when needed. I believe the market needs to see this from Japan," he added.
Currently, Japan's benchmark interest rate stands at just 1%, while the U.S. Federal Reserve's federal funds rate target range is between 3.5% and 3.75%, leaving a vast gap. Facing this dilemma, market participants are largely banking on BlackRock's expectations for the Bank of Japan to tighten policy. According to sources, the government led by Prime Minister Shigeru Ishiba supports the Bank of Japan's recent rate hikes, with the next increase possibly in September or October. The sources added that the Bank of Japan is concerned about the yen's depreciation pushing up prices, and the government also wants to strengthen the effect of recent U.S.-Japan intervention, both factors driving the need for a near-term rate hike.
Notably, with U.S. CPI and PPI data slowing and oil prices falling, the market no longer fully prices in a Fed rate hike this year. The Bank of Japan last raised rates in June by 25 basis points to 1%. Rieder expects the Bank of Japan may hike again in September, but does not rule out a delay to December. "This is crucial for market stability," he said.
Beyond intervention, the Bank of Japan has become a key variable in determining the yen's sustainability. Katsutoshi Inadome, Senior Strategist at Sumitomo Mitsui Trust Asset Management, bluntly stated: "In the short term, the only cure for the yen's weakness is a Bank of Japan rate hike." Rinto Maruyama, Senior FX and Rates Strategist at SMBC Nikko Securities, warned that current bond yields and swap rates have already priced in a September rate hike. If the Bank of Japan delays again, it will be seen as a "policy breach of trust." He added that this would cause market participants to lose confidence in the Bank of Japan's ability to hike further, triggering a renewed yen decline and potentially pushing up long-term bond yields due to inflation concerns.
Meanwhile, Masayuki Nakajima, Senior Strategist at Mizuho Bank, said the market focus has shifted from "whether to hike in September" to "the pace of tightening after a hike." Changes in speculative positions also reflect this shift in expectations. Data from the U.S. Commodity Futures Trading Commission (CFTC) for the week ending August 4 shows that after U.S. and Japanese officials coordinated to stabilize the yen, hedge funds have halved their yen short positions. This is a stark contrast to late June, when these funds held the largest net short position since 2007. At the time of writing, the yen is trading at around 159.48 per U.S. dollar.
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