The yen has tumbled well past levels touted as red lines for Japan and at a pace that has traders asking when authorities might start buying the currency to support it — and why they haven’t done so already.
The yen fell past 160 per dollar for the first time since 1990 on Monday in thin liquidity during a public holiday in Japan, after the nation’s central bank last week indicated financial conditions will remain easy.
Policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast and Finance Minister Shunichi Suzuki reiterated after the Bank of Japan meeting that the government would respond appropriately to foreign-exchange moves. Earlier this month he also flagged concerns over the yen’s decline to US Treasury Secretary Janet Yellen, which market participants saw as laying the groundwork for intervention.
“For FX intervention to be successful in turning dollar-yen around, better Japanese economic data would most likely have to be matched with slower growth and softening price pressures in the US,” Jane Foley, head of foreign-exchange strategy at Rabobank wrote in a note to clients. “That suggests that the Ministry of Finance’s attempts at scaring speculators away from further increasing their short yen positions could continue for some weeks.”
Top currency official Masato Kanda has given an example of a 10-yen move over one month as a rapid one. Japan’s currency has weakened by about 7 yen per dollar over the last month, but it fell over 2% last week alone and is down more than 10% year-to-date.
“Authorities may say they don’t target levels per se, but they do pay close attention to the trend and the rate of change and current levels suggest they have to act soon or risk facing a credibility crisis,” said Chris Weston, head of research at Pepperstone Group Ltd. “The FX market is almost taking them on like the bond vigilantes of old.”
One reason for Japan’s seeming reluctance to act may be that intervention alone cannot alter the wide gulf in interest rates that’s in part driving the yen’s decline. While the BOJ has brought local rates out of negative territory, they are still far from levels that would tempt investors from the higher yields on offer in the US and other countries.
Strategists at Goldman Sachs Group Inc. say the global macroeconomic background points to further yen weakness and that may make it tough for intervention to succeed.
“Our baseline outlook of solid growth, gradual policy adjustments and upside risks to forward rates is a very negative mix for the yen,” wrote a team including Kamakshya Trivedi, the head of global currency, rates and emerging-market strategy. “The only question then is the extent to which Japan policymakers will push against yen depreciation, but we think the tools are limited.”
Still, the risk of intervention will rise materially if the yen continues to underperform other assets like it did on Friday, the Goldman strategists added. The currency fell 1.7% that day, the most in six months, to around 158.30 per dollar.
It’s also the case that a weaker yen is not necessarily that bad for Japan, says Deutsche Bank AG’s global head of foreign-exchange research, George Saravelos. The currency’s decline isn’t causing an inflation problem and is pushing up the value of overseas assets held by Japanese investors, he wrote in an emailed note.
During a press conference after Friday’s BOJ policy decision, Governor Kazuo Ueda played down the impact of the weak yen on inflation, saying the exchange rate continues to benefit the economy by boosting demand.
“Japan is following a policy of benign neglect for the yen,” Saravelos said Friday. “The possibility of intervention can’t be ruled out if the market turns disorderly, but it is also notable that Governor Ueda played down the importance of the yen in his press conference today as well as signaling no urgency to hike rates.”
For their part, traders seem to be positioned against a successful intervention by Japan. In the run-up to the BOJ meeting, combined bets by hedge funds and asset managers on the currency’s weakness reached the most on record according to Commodity Futures Trading Commission data going back to 2006. Meanwhile, angst is rising, as evidenced in a jump in measures of implied volatility for the pair last week.
While being short the Japanese currency at current levels is risky, bearish speculators will likely be planning to buy dollar-yen again at lower levels should officials act, said Pepperstone’s Weston.
“I can imagine hedge funds setting algo’s with limit orders 400-500 pips under spot to capture an intervention move,” he said. “Naturally, in the belief that any sharp dip will come back quickly.”
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