Many of us know the chain of events set in motion, when you tell a toddler in very specific terms what they should NOT do. Sometimes financial markets act in the same way.
In this year’s yen episodes, the grown-up is the Japanese top foreign-exchange official, Masato Kanda, who has stated numerous times that excessive FX movements will be met with interventions.
Many, many currencies have weakened against the dollar in 2024 (because House of High Interest Rates) but few as much as the Japanese yen. Remember that back in March, Japan began to reverse its long-running negative rate regime which didn’t prove to be the economy booster it was hoped to be.
The movement into positive rates is still in progress because it has to be done bit by bit with a steady hand to avoid undue market volatility. And, preferably, also in unison with other countries (aka the US) lowering their rates, so the spread gets smaller from both sides. (This is the opposite of Nutella; a smaller spread is better.)
Well, that did not happen.
Instead, the US dug in its heels further on the rates by holding on for now and lowering the expectation to just one rate cut this year, down from three in March.
Then the markets tried to make the most of the American inaction, holding onto their high-yielding dollar-denominated assets, putting pressure on the yen, and again testing what Mr. Kanda means by excessive.
The point at which Bank of Japan is asked to intervene is not explicit or fixed because then the market toddlers would be touching it all the time. It is more of a soft, implicit threshold affected by context and speed.
Recently, it has been believed to be 160 yen to a dollar, but in the past 48 hours the tone has shifted more to 163.
What we learned a little after the fact was that BoJ already spent a record ¥9.8 trillion during May propping the yen up. That’s a lot of money, though less and less in USD.
And the other grownup (the US) doesn’t like it when its trading partners fiddle with their currencies, especially not if it can be construed as a way to become more competitive against the dollar.
While Japan is trying to go in the other direction, the US Treasury did put Japan on the semiannual list of countries to watch out for, though it stopped short of calling Japan a currency manipulator.
Sticks and stones and all that aside, dubbing a trading partner as manipulative, currency-wise, is the American way of signaling to the partner to be more forthcoming and timelier with the informational details or else…
So it seems the drama season is not over yen. Not much has changed in the underlying economic conditions. The rate spread remains wide. BoJ has funds with which to intervene. The toddlers will be back after their nap, pressing that button until it is taken away.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.