The exchange rate of the Japanese yen against the US dollar has depreciated by more than 10% since the beginning of this year. Despite the Bank of Japan’s announcement last month to end the negative interest rate policy, the yen continues to depreciate. Today, it fell below the 160 level, reaching a new low since April 1990. Experts believe that if the Federal Reserve delays interest rate cuts and the US dollar continues to strengthen, the yen may further depreciate.
During the Golden Week holiday from April 27th to May 6th, the foreign exchange market was trading normally, and the yen-dollar exchange rate fell by 1.2% to 160.17 in the morning of the 29th, reaching a new low in nearly 34 years. However, it rebounded later, surging more than 2% to around 155, which raised suspicions of intervention by the Bank of Japan.
According to Reuters, the sharp rise of the yen today was mainly due to the Bank of Japan selling US dollars and buying yen. Tony Sycamore, a market analyst at IG Australia in Sydney, also stated that the Bank of Japan intervened.
However, according to Bloomberg, the violent fluctuations of the yen occurred during the quiet holiday period, and these fluctuations may not be related to the intervention of the Bank of Japan but rather the indecisiveness of nervous traders between the prospect of official intervention and the risk of hawkish statements by the Federal Reserve later this week.
When asked about whether there was intervention in the foreign exchange market today, Kanda Masato, Japan’s chief currency diplomat, only stated that he “will not comment at this time.” Some market participants attribute the violent fluctuations to low trading volume and low liquidity. Shoki Omori, chief strategist at Mizuho Securities, stated that algorithm-driven trading may be partially responsible, but others have seen signs of intervention by the Bank of Japan.
It is worth noting that the Federal Reserve will announce its interest rate decision this Thursday. Given the unexpected rise in US inflation, it is expected that the Federal Reserve will indicate the need to maintain a high level of interest rates. This move may support the US dollar and undermine the attractiveness of the yen. Investors may sell the yen and buy the dollar due to the interest rate differential between Japan and the US, leading to further depreciation of the yen.
Fiona Lim, senior strategist at Maybank, stated that if the Bank of Japan does not intervene, especially in the case of a possible delay in interest rate cuts by the Federal Reserve, it is very dangerous to catch the falling yen now. The yen-dollar exchange rate is likely to break below 160, and the market is testing the tolerance of Japanese authorities for a significant depreciation of the yen.
The Bank of Japan stated last week that it will maintain loose monetary conditions. However, it will not tolerate excessive or rapid depreciation of the yen. Earlier this month, the Japanese Finance Minister expressed concerns about the depreciation of the yen to US Treasury Secretary Janet Yellen. Market participants believe that this lays the foundation for intervention.
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