Q2 Market Recap: Yen at 30-Year Low

The Japanese Yen will stagger into the new calendar quarter at lows not seen against the United States Dollar for thirty years and more. Given that, it’s tempting to suggest that the currency can have nowhere much to go but higher in the months ahead, but, sadly for that rarest of creatures, the Yen bull, that’s not the case.

The reason for the Japanese unit’s weakness is easy enough to spot. With the Bank of Japan’s base rate hovering between zero and just 0.1% the Yen offers yields which are simply unattractive compared to those of major, ‘risk free’ peers. US ten-year benchmark yields are 4.3%, for example, but you can take your pick really. Everyone offers you better returns than Japan.

This has been the case for a very long time, of course. Japan spent decades pursuing a policy of ultra-loose monetary settings in a desperate attempt to stimulate some domestic demand and pricing power. What’s a bit different now is that the country officially exited this policy back in March. Back then it raised interest rates for the first time in a scarcely believable seventeen years. It also started to dismantle the other pillar of its extreme monetary largesse, the policy of controlling its own government yield curve via vast, targeted bond buying.

Now this is Japan we’re talking about, and the process of monetary tightening was always going to be measured and gradual. The Yen was never going to become a tempting yield play overnight. Still, the authorities in Tokyo might feel slightly aggrieved that they got so little Yen support for their actions. The problem was that, when they moved back in March, it was still thought likely that US interest rates would be coming down soon, and that they’d keep falling.

Things didn’t work out that way. US rates remain very high by recent standards, with the Federal Reserve still not sure that it’s got inflation quite where it wants it. Most other western central banks are in a similar bind; rates may indeed fall when they move at all, but they’re not moving yet.

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Weak Yen Isn’t All Bad For Japan

This hasn’t been all bad news for Japan, of course. A weak Yen has seen tourists arrive in droves, eager to spend, and Japanese exports are surging away. However, that same weakness is making imports much more expensive, exacerbating cost-of-living worries, and threatening to strangle the very domestic demand which the authorities want.

The Yen might get another interest rate rise early in the quarter, data permitting. This might serve to put something of a floor under it, at least, if no more than that. However, everything will really depend on what the Fed does. At present the market is betting on just one interest rate cut, possibly late in the year. If inflation wilts (as it may) the markets will scent more action and the Dollar will probably slide against everything, the Yen included.

The risk must be, though, that US rates remain in ‘higher for longer’ mode throughout the quarter. This is all-but sure to mean even more Yen weakness even if the authorities in Tokyo act as best they can to slow it down. There are clear limits to their ability to do that, however. The BoJ spent over US$20 billion back in May on Yen buying ‘intervention’ to slow the Yen’s fall. It had some success, but the dominant uptrend remains very much in place.