Global Rate Dynamics Push Yen Lower On Thursday, the yen, often referred to as the "anchor of global asset pricing," plummeted to its lowest level in a year, breaking the psychologically significant 150 threshold.
Overnight, U.S. Treasury yields surged, with the 10-year yield jumping 13 basis points to 4.96%. This spike followed weaker demand for five-year U.S. Treasury notes, intensifying concerns about an expected increase in auction size to be announced next week. Even before the auction, yields were already on the rise, driven by stronger-than-expected U.S. new home sales data for September.
After the yen fell below the 150 mark against the U.S. dollar, forex traders became cautious, recalling past interventions by Japanese authorities at this level. Japanese officials have repeatedly stated they won't rule out any options to curb excessive currency fluctuations. Japan's Finance Minister, Taro Aso, previously noted that authorities are closely monitoring currency movements with a sense of urgency.
Bank of America: Possible Intervention Ahead of BoJ Meeting Currently, the Bank of Japan (BoJ) faces a dilemma: maintaining low interest rates to stimulate the economy and wage inflation while stabilizing the exchange rate to prevent imported inflation from eroding domestic purchasing power and slowing the domestic recovery.
Speculation about the BoJ taking some policy action has been heating up due to the yen's weakness, rising Japanese bond yields, and stronger-than-expected inflation in Japan.
A report in Japanese media last weekend suggested that the BoJ might consider adjusting its Yield Curve Control (YCC) program at its upcoming meeting, although officials are reportedly divided on the issue.
Interestingly, before the BoJ adjusted its YCC policy in July, Japanese media had hinted at such a move.
However, some analysts argue that when faced with the "impossible trinity," the BoJ has consistently chosen to prioritize bonds over the currency.
Strategists at Bank of America, including Shusuke Yamada, noted in a report earlier this month that the BoJ's attempts to support the yen by raising interest rates, especially through the 10-year bond yield, could be costly. This might necessitate Quantitative Tightening (QT), potentially destabilizing Japanese and global bond markets and facing political resistance due to its impact on the sustainability of public debt.
Moreover, an early rate hike is unlikely to be used to defend the yen. The bank's economists believe the earliest the BoJ might abandon its negative interest rate policy is at its December meeting, with a baseline forecast for the January meeting next year.
Bank of America suggests that the Japanese Ministry of Finance might intervene in the forex market to curb excessive volatility before the BoJ's October policy meeting. If U.S. rate fluctuations intensify, the risk of the Japanese Ministry of Finance intervening in the forex market could further increase.
Additionally, the bank believes that, until U.S. rate volatility subsides, Japanese policymakers might have to rely on forex interventions and additional bond purchases to alleviate the weakness in the yen and Japanese government bonds. These actions could send mixed signals to the market. Meanwhile, for the remainder of 2023, shorting Japanese government bonds and betting against the yen in favor of the U.S. dollar will continue to be a trading strategy for investors in the Japanese market.
