Written by Ankur Banerjee and Ray Wei
SINGAPORE (Reuters) – Japan appears to have bought some time and respite for the falling yen during its latest suspected wave, but it has also set itself up for a protracted war with a market that views the currency as a sell-off in disguise, analysts say. .
Traders estimate the Bank of Japan spent nearly $59 billion defending the currency this week, helping put the yen on track for its best weekly performance in more than a year.
The Japanese currency rose 5% from its 34-year low of 160.245 hit on Monday. Tokyo has not yet confirmed its intervention.
But this week's rally was not linear in a decidedly bear market for the currency, given the huge gap between its very low yields and those in other major economies.
The yen swung sharply during the suspected bouts of intervention, rising by nearly 5 yen in a matter of minutes and quickly giving up part of that.
“Nothing has really changed,” said Rob Carnell, head of Asia-Pacific research at ING. “I think this has provided a pause in what will inevitably be experienced again by markets, which will view this as free money when dealing with the Bank of Japan…”
Carnell says the yen has become a “traders' dream,” as they can easily make money by buying dollars against the yen, waiting for the pair to rise and then selling as the Bank of Japan steps in to support the yen.
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“You'd be crazy not to test it, knowing they're going to get involved at some point,” he said.
Before the suspected market forays this week, Japanese authorities last intervened between September and October in 2022 and spent about $60 billion defending the currency.
The yen's price at the time was close to 152 yen to the dollar, but within two months of that intervention, the yen's price fell again. It lost 20% of its value against the dollar when it hit 1990 lows this week.
“Due to the large spreads in prices, speculators will remain on the other side of this trade,” said Caspar Hines, portfolio manager at BlueBay Asset Management.
The difference between benchmark 10-year US Treasury bond yields and Japanese government bond yields is about 4 percentage points.
No goals
Japan's Ministry of Finance, whose job it is to manage the yen, is well aware of how monetary settings stack up against the yen, and is only working to contain the pace, says Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management. of consumption.
He added: “Intervention has a price, and I believe that the Ministry of Finance will not be willing to spend money on a specific goal.”
Even after the Bank of Japan moved away from negative interest rates in March, the yen remains the cheapest major currency to borrow and short, sealing its fate.
Analysts say this further complicates the outlook for the yen, but 160 appears to be the level the Bank of Japan wants to protect.
Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo, believes Japanese authorities view the decline after their meeting in March as “speculative and unacceptable” and may be aiming to return the yen to 155 yen to the dollar where it was before this important policy decision.
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Yujiro Goto, head of currency strategy for Japan at Nomura Bank, feels the authorities just want to help their importers get the dollars they need.
“I think the 150 level is ideal for Japanese importers. I think the 152-152.50 level is probably what the Finance Ministry wanted to achieve, but it did not reach that level, so there is a risk that the Finance Ministry will come back for another round.”
Speculators also realize that the government's war chest is not unlimited. Japan has about $1.3 trillion in currency reserves, but only about $155 billion is held in the form of liquid dollar deposits.
Meanwhile, the Fed's bets on cutting interest rates are declining as the US economy and labor markets remain hot. Short speculative positions in the yen reached their highest levels in 17 years.
Japan is just trying to end unilateral asymmetric speculation, rather than defending any yen levels, says Fred Newman, chief Asia economist at HSBC.
“Given the fact that US interest rates are rising for a longer period, this is an expectation management exercise. It is not an exercise that necessarily leads to a rapid appreciation of the yen,” he said.
($1 = 152.8600 yen)