Japanese Yen Plummets to 34-Year Low Against US Dollar Amid BOJ Intervention

The Japanese yen has reached a staggering 34-year low against the US dollar, with the USDJPY pair surging to the 160 level, a resistance point not seen since 1990. The significant depreciation of the yen has prompted the Bank of Japan (BOJ) to take action, raising interest rates in an effort to support the struggling currency. Despite the BOJ's intervention, analysts predict that the yen may continue to weaken, with a potential reversal down to the 137-127 area on the horizon.

Why this matters: The yen's sharp decline has significant implications for global trade and investment, as a weaker yen can impact Japan's export-driven economy and influencecurrency markets worldwide. Furthermore, the BOJ's interventions and the subsequent market reactions can have far-reaching consequences for monetary policy and central banks' ability to manage currency fluctuations.

The yen's sharp decline can be attributed to a combination of factors, including the BOJ's ultra-loose monetary policy, which has caused the currency to depreciate against its main peers. This policy divergence has been exacerbated by the actions of other central banks, further widening the interest rate differential between the US and Japan. With a spread of nearly 4 percentage points between the benchmark 10-year US Treasury and Japanese government bond yields, speculators are increasingly attracted to shorting the yen.

In response to the yen's rapid depreciation, the Japanese government has intervened in the foreign exchange market, with the BOJ suspected of spending nearly $59 billion this week alone to defend the currency. While these interventions have provided temporary relief, pushing the USDJPY pair down to 153, experts believe that the yen's troubles are far from over. Vincent Chung, a strategist at T Rowe Price, notes, "The primary driver of USD/JPY is the interest rate differential over time... I believe that the yen is expected to depreciate further. But reaching 160 seems too rapid, indicating speculation at play."

The BOJ's interventions have created a lucrative opportunity for traders, who can make easy money by buying dollars for yen, waiting for the pair to rise, and then selling when the central bank steps in to support the yen. Rob Carnell, head of Asia Pacific research at ING, observes,"Nothing's actually changed... I think this has provided a momentary pause in what will inevitably be tested by markets again. "With speculative short yen positions running up to their largest in 17 years, the BOJ's war chest of around $1.3 trillion in currency reserves, with only $155 billion in liquid dollar deposits, is not bottomless.

Analysts suggest that a more sustainable strategy for strengthening the yen would be for the BOJ to continue the modest tightening cycle it began in March. Sim Moh Siong, a currency strategist at Bank of Singapore, advises, "A better strategy for a more sustained re-strengthening of the yen would be for the BoJ to make good on the modest tightening cycle it embarked upon in March this year... The BoJ can afford to hike by a further 25 basis points this year." However, with the US Federal Reserve showing no signs of slowing down its rate hikes, the pressure on the yen is likely to persist.

The yen faces turbulent waters, and investors and policymakers closely monitor the situation. The BOJ's interventions, while providing short-term relief, have not addressed the underlying factors driving the yen's weakness. With the US dollar remaining strong and interest rate differentials widening, the path ahead for the Japanese currency appears challenging. Junichi Inoue, head of Japanese equities at Janus Henderson Investors, cautions,"From the perspective of purchasing power parity, the current exchange rate is considerably oversold... Having $1.3 trillion in FX reserves, the second-highest level in the world, makes it reckless to target yen for speculative selling."

Key Takeaways

• Japanese yen hits 34-year low against the US dollar, reaching 160 level.
• BOJ raises interest rates to support the yen, but analysts predict further weakening.
• Yen's decline attributed to BOJ's ultra-loose monetary policy and interest rate differential.
• BOJ's interventions provide temporary relief, but underlying factors remain, putting pressure on the yen.
• Analysts suggest BOJ should continue tightening cycle to strengthen the yen sustainably.