The decline of the yen has put the Japanese authorities on high alert

Over the past week, Japanese travel agents have reported an increase in inquiries about flights to Hawaii for the Honolulu Marathon – a heavenly 26-mile course held in late December and, in times deeply uncertain, probably as good as any indicator for the yen’s next move.

By mid-August, analysts could plausibly say that after a precipitous decline since March, the yen’s weakness against the dollar had likely reached its limit. The 24-year low of ¥139 to the dollar hit so dramatically in mid-July, they suspected, had proved a robust resistance level; the new balance of probabilities now pointed to a strengthening phase for the yen towards the end of the calendar year, with many forecasting a rise to around ¥130/$.

The thesis was based on the idea that the factors that had been driving the yen’s decline – primarily the growing policy divergence between the rate-hiking US Federal Reserve and the staunchly ultra-loose Bank of Japan – had subtly changed over the summer. In mid-August, and with the yen short trade seemingly less popular with speculators, Nomura analysts could list several such changes in the market environment.

Between July and August, the perceived probabilities of a US and global recession shifted from a risky scenario to a main scenario. A downward trend in commodity prices gave hope for an improvement in Japan’s trade balance. Expectations of an imminent peak in property price inflation were higher in mid-August than at the start of the year. The risk of an acceleration in US rate hikes appears to have diminished, even as the perceived chances of a normalization of BoJ policy under Governor Haruhiko Kuroda have remained virtually nil.

It all made sense until this week, when the yen fell to the ¥/$140 level and a new 24-year low as the market, following hawkish comments from Fed officials, returned. to the assumption of an aggressive multiple rate. increases in the United States in the coming months. The change in mood was instantaneous. Japanese officials said they were monitoring the currency markets again “with a high sense of urgency.”

Traders have started to assume a definite break above the ¥/$140 line in the next few days. If that happens, some traders say they can’t identify any obvious technical support levels between here and the yen’s 1998 low at ¥/$147. After taking a bold kick calling the dollar-yen peak three weeks ago, Nomura decently faked that there would be a “slight delay” to his previous forecast.

Some are even clearer about the new momentum. JPMorgan analysts said on Thursday they wouldn’t rule out the yen falling deeper beyond ¥/$145 as policy divergence resumed influence on the currency pair that had slumped over the course. of summer.

As this influence resumed, the perceived risk of speculative bets against the yen also contracted. In the face of a long summer of geopolitical turmoil and the threat of recession, the idea of ​​the yen as a safe haven has barely taken hold, removing a once-reliable source of support.

Another historical pattern that broke down, noted CLSA strategist Nicholas Smith, was a historical correlation of the dollar-yen exchange rate with foreign investors’ propensity to buy and sell Japanese stocks. A weaker yen has in the past prompted net purchases of Japanese equities. In 2022, however, the yen has plunged and foreigners have been net sellers of more than 650 billion yen worth of stocks since January.

Meanwhile, said JPMorgan’s Benjamin Shatil, the yen has come under increasing downward pressure due to the recent surge in so-called yen carry – the investment strategy of borrowing in a foreign currency. yield and sell it to finance speculative investments in higher currencies. . As countries other than the United States enter cycles of monetary tightening, the yen is quickly becoming the only zero-return currency in the world, inviting yen-funded carry trades on a growing selection of currency pairs.

BoJ data on the evolution of foreign bank assets and liabilities in Japan, which can to some extent be treated as a proxy for yen carry, suggests the strategy is the most active in over a decade. . The implication here, Shatil said, was that unless the BoJ pivoted, yen-funded carry trades had the potential to rise further.

Still, traders say, there are other sources of yen flow that could prove more influential in the coming months. After long dithering, Japan seems to be crawling towards a full-scale reopening of its borders to foreign tourists. Even if such a recovery does not, for now, involve big-spending Chinese tourists, the influx would create a more permanent backlash from yen buying.

More immediately influential, however, will be Japan’s decision last week to drop its requirement that anyone entering the country must present a negative PCR test taken within 72 hours of travel. The lifting of this rule, starting next week, should trigger a rapid recovery in Japanese bookings of overseas holidays, shopping trips and exotic marathons: a potential decline in yen outflows before the inbound tourism boom n have a chance to make up for them.

leo.lewis@ft.com

The decline of the yen has put the Japanese authorities on high alert

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