The Japanese yen is trading near the 160 level against the US dollar once again, despite reports that Prime Minister Shigeru Ishiba's government is backing a Bank of Japan interest rate hike. On Thursday, the yen held steady at around 159.36 per dollar, hovering just a hair's breadth away from the key threshold that has historically triggered government intervention to support the currency.
According to sources familiar with the matter, the next rate move is likely to occur in September or October. They added that the BOJ's concern over "a weak yen pushing up prices" is converging with the government's desire to "strengthen the effect of recent US-Japan FX intervention," with both sides now aligned on the need for a rate hike in the near term. Investors, however, said the news had little impact on the yen, as the market had already priced in an expected BOJ rate increase. The yen has been weakening recently due to Japan's significant interest rate differential with the US and its heavy debt burden.
Where to start
Masayuki Nakajima, a senior strategist at Mizuho Bank, said, "As a result, the market's focus has shifted from 'whether the BOJ will hike in September' to 'how fast the tightening pace will be after that.'" Previous discussions about a BOJ rate hike failed to sustain the yen's gains. Meanwhile, Japan's 10-year government bond yield stood at 2.89% on Thursday, not far from the 30-year high hit last month. The Prime Minister's office said in an emailed statement, "We believe that specific monetary policy measures, including rate hikes, should be left to the BOJ's discretion."
Why all interventions are just 'buying time'
Francesco Pesole, a strategist at ING, said that while he expects the yen to move back toward 160, expectations of looser US monetary policy in the coming weeks will provide support for the Japanese currency. "The problem right now, in my view, is that the market still has a relatively hawkish view of the Fed," he said. Shusuke Yamada, head of Japan FX and rates research at Bank of America, noted that "after the coordinated intervention with the US on July 31, the market's confidence in Japan's resolve to 'defend the yen' increased. However, the dollar's rebound against the yen last week without any intervention seems to have eroded that credibility."
Karen Fishman, senior FX strategist at Goldman Sachs, said Japan has enough cash to conduct several more rounds of yen-buying interventions on the scale of the recent US-Japan joint action. Goldman Sachs estimates that the Japanese government spent about $85 billion in the first two days of last month's operation. This marked the largest two-day intervention in Japan's history, second only to October 2011, when Tokyo stepped in following the Fukushima disaster. Japan's Ministry of Finance said it would use the Fed's FIMA Repo Facility to borrow dollars by pledging its holdings of US Treasuries. Japan has approximately $1 trillion in foreign exchange reserves, of which about $200 billion is in cash or cash equivalents.
Fishman said, "Realistically, they are far from running out of this money, but I think that shows they have enough ammunition to keep intervening if they want to." However, she warned that intervention is not a sustainable solution and is "ultimately just buying time." She pointed out that after Tokyo's unilateral interventions in April and May, the yen returned to 40-year lows within a few months.
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