OPINION
Market Rating Before FOMC MeetingJan 31
Will the Japanese Yen Freefall Continue?
In the global markets, we see that the strong dollar has put the currencies of developed countries under pressure recently. At this point, the Japanese yen is undoubtedly at the top of the majorly depreciated currencies. It would not be wrong to say that the official currency of Japan, an important member of the G-7 countries, the yen is in a free fall against the US dollar.
Yesterday, the US dollar hit its highest level since 1990 at 148.90 against the Japanese yen. Here, it is possible to say that the effects of the Bank of Japan's (BoJ) maintaining its loose monetary policy stance plays a fundamental role, while the developed and developing central banks have been taking tightening steps in the face of high inflationary pressures.
However, it is seen that the bank has been continuing its expansionist stance for a long time to reach the 2% inflation target permanently. The BOJ has been keeping the policy rate constant at -0.10% since January 2016 to reach the inflation target.
As a matter of fact, with the outbreak of the Russia-Ukraine war in February, it is obvious that many countries, especially Europe, have been struggling with the inflation problem due to the energy crisis and high commodity prices. This situation has also affected Japan immensely.
One Step Behind: According to the data of the Statistics Bureau of Japan (SBJ), the consumer price index (CPI) in the country reached its highest level in 8 years with 3.0% on an annual basis in August.
It is known that the BOJ has a permanent 2% inflation target. However, it is desired that inflation should originate from domestic demand, not from supply-side reasons originating from external factors. In this regard, BoJ Chairman Harihuko Kuroda's statement that the bank will maintain its ultra-loose monetary policy stance until wages rise, and Prime Minister Fumio Kishida's support is critical.
On the other hand, the US Federal Reserve (FED) continues to tighten aggressively. The fact that the real interest rate of the dollar rises above the 0 point plays an important role in the rise of the USDJPY parity to the highest level in 32 years.
The FED, which started to increase interest rates by 25 basis points in last March, carried out policy tightening by 50, 75, 75, and 75 basis points, respectively, in the following May, June, July, and September meetings.
On the other hand, as reported by the US Department of Labor, the CPI reached the peak of 41 years with 9.1% in June and then decreased to 8.5%, 8.3%, and 8.2% in July, August, and September, respectively. The fact that inflation did not regress as desired despite downshifting leaves the door open for the FED to continue aggressive interest rate hikes, and a 75 basis point tightening is highly likely in November.
With the effects of all these, the Japanese yen is collapsing against the US dollar. As it will be remembered, on September 14, the yen fell to the lowest level in 24 years against the dollar at the level of 144.55, and the BoJ reduced the USDJPY parity to the level of 142.63 with an intervention estimated to be about 25 billion dollars. It should also be noted that the intervention in question is the first since the 1998 Asian crisis.
However, the yen failed to show a lasting recovery against the US dollar. With the continued hawkish statements of leading FED Officials in recent days and the expectation that the bank will tighten aggressively, the US 10-year bond yields have risen to the level of 4.00%, while the pressure of the strong dollar makes it difficult for the yen to find demand with its safe-haven nature.
Today, the USDJPY parity has once again updated its peak since May 25, 1990, with 149.13 in current terms. Sources close to the subject state that the Japanese government may carry out another foreign exchange intervention shortly.
To sum up, the weakening cycle in the yen is likely to be maintained as long as the monetary policy divergence continues between the FED and BoJ, which maintains its ultra-loose monetary policy with a demand-side 2% permanent inflation rate target. However, even if another intervention in the exchange rate from the Japanese wing will cause the parity to decrease a little, it seems inevitable that it will be considered a buying opportunity unless a new story is presented to the market.
Yesterday, the US dollar hit its highest level since 1990 at 148.90 against the Japanese yen. Here, it is possible to say that the effects of the Bank of Japan's (BoJ) maintaining its loose monetary policy stance plays a fundamental role, while the developed and developing central banks have been taking tightening steps in the face of high inflationary pressures.
However, it is seen that the bank has been continuing its expansionist stance for a long time to reach the 2% inflation target permanently. The BOJ has been keeping the policy rate constant at -0.10% since January 2016 to reach the inflation target.
As a matter of fact, with the outbreak of the Russia-Ukraine war in February, it is obvious that many countries, especially Europe, have been struggling with the inflation problem due to the energy crisis and high commodity prices. This situation has also affected Japan immensely.
One Step Behind: According to the data of the Statistics Bureau of Japan (SBJ), the consumer price index (CPI) in the country reached its highest level in 8 years with 3.0% on an annual basis in August.
It is known that the BOJ has a permanent 2% inflation target. However, it is desired that inflation should originate from domestic demand, not from supply-side reasons originating from external factors. In this regard, BoJ Chairman Harihuko Kuroda's statement that the bank will maintain its ultra-loose monetary policy stance until wages rise, and Prime Minister Fumio Kishida's support is critical.
On the other hand, the US Federal Reserve (FED) continues to tighten aggressively. The fact that the real interest rate of the dollar rises above the 0 point plays an important role in the rise of the USDJPY parity to the highest level in 32 years.
The FED, which started to increase interest rates by 25 basis points in last March, carried out policy tightening by 50, 75, 75, and 75 basis points, respectively, in the following May, June, July, and September meetings.
On the other hand, as reported by the US Department of Labor, the CPI reached the peak of 41 years with 9.1% in June and then decreased to 8.5%, 8.3%, and 8.2% in July, August, and September, respectively. The fact that inflation did not regress as desired despite downshifting leaves the door open for the FED to continue aggressive interest rate hikes, and a 75 basis point tightening is highly likely in November.
With the effects of all these, the Japanese yen is collapsing against the US dollar. As it will be remembered, on September 14, the yen fell to the lowest level in 24 years against the dollar at the level of 144.55, and the BoJ reduced the USDJPY parity to the level of 142.63 with an intervention estimated to be about 25 billion dollars. It should also be noted that the intervention in question is the first since the 1998 Asian crisis.
However, the yen failed to show a lasting recovery against the US dollar. With the continued hawkish statements of leading FED Officials in recent days and the expectation that the bank will tighten aggressively, the US 10-year bond yields have risen to the level of 4.00%, while the pressure of the strong dollar makes it difficult for the yen to find demand with its safe-haven nature.
Today, the USDJPY parity has once again updated its peak since May 25, 1990, with 149.13 in current terms. Sources close to the subject state that the Japanese government may carry out another foreign exchange intervention shortly.
To sum up, the weakening cycle in the yen is likely to be maintained as long as the monetary policy divergence continues between the FED and BoJ, which maintains its ultra-loose monetary policy with a demand-side 2% permanent inflation rate target. However, even if another intervention in the exchange rate from the Japanese wing will cause the parity to decrease a little, it seems inevitable that it will be considered a buying opportunity unless a new story is presented to the market.
