Copyright © BusinessAMBE 2023

A remarkable move last weekend in Japanese markets. After the yen recorded a spectacular plunge against the dollar and the euro, the currency bounced back. What is going on?

Japanese monetary policy is still very soft, or "dovish. Despite the yen's free fall, which is hurting the economy considerably, the Bank of Japan refuses to firmly raise interest rates. The question is how long that is sustainable.

In the news: The yen climbs another 2 percent after falling 1.2 percent.

  • First the news sounded startling: the yen was at its lowest level in 34 years. 1 dollar was worth 160 yen this weekend, a limit that made traders look up enthusiastically. To them, this was an enticing offer. "It's like a dog chasing a frisbee," Vishnu Varathan of Japan's Mizuho Bank in Singapore described the phenomenon.
  • A euro, in turn, was worth 170 yen, a value not seen since 2008.
  • The Bank of Japan (BoJ) is known for its "subzero policy": it refuses to raise interest rates significantly, as U.S. and European central banks did. In mid-March, the BoJ finally raised interest rates, forking between 0 and 0.1 percent. At the same time, the governor of Japan's national bank, Kazuo Ueda, cited last Friday that he does not plan to raise interest rates much more.
  • But, equally remarkable: the currency rebounded Monday morning to 155 yen per dollar.

"The perfect time to intervene"

The question: did the BoJ intervene or not?

  • Although policymakers would not comment on the surge for now, Tony Sycamore, market analyst at IG Australia, noted that it had "all the hallmarks of an actual intervention" by the BoJ.
    • Because there was less trading in the markets last weekend due to a Japanese holiday, there was "lower liquidity in dollar-yen and more value for money from the BoJ," he explained to news agency Bloomberg. According to Sycamore, this was the perfect time to adjust.
  • Other analysts, however, see no intervention by the BoJ in this, and believe that the fluctuations can be explained by low trading over the extended holiday weekend or by certain algorithms used to trade.

The yen remains under pressure

To follow: If the BoJ does not raise interest rates, should politicians act?

  • Jerome Powell, the Federal Reserve's top executive, is expected to insist Wednesday that he will not cut interest rates in the United States for the time being. That will presumably remain at 5.5 percent, due to still high inflation.
  • That seems dire for the BoJ. Economists warn of a shock wave if interest rates were to be raised to the same high levels in one fell swoop. Hence, the BoJ continues to believe in the gentle policy it is currently pursuing.
  • And so the BoJ is mostly waiting. Homin Lee, senior macro strategist at Lombard Odier in Singapore, warned to Bloomberg that "pressure on the yen will continue until we get lesser growth and inflation data in the U.S. and a clearer hawkish shift at the BoJ."
  • And if the BoJ does nothing about interest rates, Lee sees Japan's finance ministry taking action: "We still think we're pretty close to that, given the recent rhetoric about excessive movements in the currency market."
    • Since New Year, the yen has lost as much as 11.5 percent. With that, the currency is doing worse than the Turkish lira's 9 percent.

© The Content Exchange, source News