Difficult to prevent the depreciation of the yen

The exchange rate of the Japanese yen on September 7 fell to its lowest level since the beginning of the year and is at risk of reaching last year's "bottom" of 151.94 yen per USD.

The Japanese government has begun to step up intervention, with statements suggesting that intervention is possible. But experts say the yen’s current weakness reflects the interest rate differential between Japan and other markets, making it difficult to prevent further depreciation of the yen in the near term.

One factor driving the yen sell-off is the widening gap between Japan and overseas interest rates. The U.S. non-manufacturing purchasing managers index for August, released by the Institute for Supply Management, showed that the index beat market estimates. This would likely prompt the Federal Reserve to raise interest rates, creating momentum for a sell-off of yen to buy dollars. On September 7, the yen-dollar exchange rate was around 147 yen to 1 dollar.

The Bank of Japan (BoJ) is still maintaining its ultra-loose monetary policy, keeping short-term interest rates at negative levels. Meanwhile, in most major countries in the world, central banks have been in a cycle of raising interest rates since last year, in order to control rapidly rising inflation.

According to JPMorgan Chase Bank, the gap between Japanese interest rates and the average interest rate around the world has reached 4.8 percentage points.

The spread exceeds the level seen in 2007, the heyday of the yen-for-yen trade, in which investors borrowed yen at low interest rates to trade for gains in stronger currencies. It is also the widest spread since 2001.

In 2000, the BoJ ended its zero interest rate policy, which had been in place since 1999, but kept it at a low 0.25%. In 2001, the country again brought interest rates to zero along with a quantitative easing policy move.

In contrast, the Fed in 2000 raised interest rates to 6.5% in an effort to tame the dotcom bubble (a term used in the 1990s when stocks of technology companies, Internet businesses with .com domain names collapsed due to overinflation).

“The interest rate gap between Japan and overseas will widen to nearly 5 percentage points by the end of 2023,” said Tohru Sasaki, head of Japan market research at JP Morgan.

In July, the value of internal accounts of foreign bank branches in Japan, reflecting the size of the purchases, totaled 10 trillion yen. However, this is still less than half the peak reached in 2007, meaning there is still considerable room for further expansion of purchases, a move that would further weaken the yen.

Speculators have been net sellers of the yen since March 2021, and the selling momentum remains strong, according to estimates from the US Commodity Futures Trading Commission.yenThis has now become the second longest cycle since 2000. The longest cycle lasted from 2012-2015, coinciding with the implementation of the "Abenomics" economic policy and the BoJ's ultra-loose monetary policy.

Although the BoJ appears less concerned about the yen's depreciation and continues to maintain its ultra-loose monetary policy, Japanese government officials are wary of a prolonged decline in the yen.

Vice Minister of Finance in charge of international affairs, Masato Kanda, affirmed that he is monitoring the situation and if there is any speculative behavior or violation of basic economic principles, the Japanese government will intervene with all its capabilities.