18 hrs ago
Yen Vulnerable as Holiday Liquidity Follows BOJ Disappointment
Japan’s currency, the yen, became weaker against the US dollar after the Bank of Japan raised interest rates.
Investors wanted clearer information about when more rate increases might happen.
Two members of the Bank of Japan disagreed with the decision.
Governor Kazuo Ueda gave some signals that policy had changed but did not say how quickly rates might rise.
The yen fell more than 2% last week and was near 156.86 per dollar on Monday.
A holiday in Japan means fewer traders may be active through Wednesday.
With fewer traders, currency prices can move more suddenly.
Officials might also buy yen to support it, which could create bigger swings.
Some analysts think the yen could continue weakening because US interest rates are also rising.
The yen fell as much as 1.3% against the dollar Friday after the Bank of Japan raised borrowing costs.
Two BOJ board members dissented, while Governor Kazuo Ueda gave limited guidance on the pace of future rate increases.
The yen ended Friday at 156.88 per dollar, fell more than 2% last week, and steadied around 156.86 on Monday.
Japan’s holiday through Wednesday is expected to reduce liquidity and amplify swings, including those caused by possible official intervention.
Markets price less than a 20% chance of an October hike but almost a 90% chance of a December increase.
- Who
- The Bank of Japan, Governor Kazuo Ueda, currency traders, Japanese authorities, and US authorities are involved.
- What
- The yen weakened after a Bank of Japan rate increase failed to provide strong guidance about future hikes.
- Where
- The developments center on the yen-dollar market and involve Japan and the United States.
- When
- The yen fell Friday and steadied Monday; Japan’s holiday continues through Wednesday, with the next policy meeting expected at the end of October.
- Why
- Investors were disappointed by the Bank of Japan’s limited guidance, while lower holiday liquidity, possible intervention, and higher US rates are affecting expectations.
Yen Support and Intervention
Continued Yen Weakness
Official intervention
Yen Support and Intervention
Japanese authorities could return to the market to buy yen and limit further weakness, particularly during the holiday’s thinner liquidity.
Continued Yen Weakness
Intervention could cause rapid price swings without creating a lasting yen uptrend.
Future Bank of Japan policy
Yen Support and Intervention
Governor Kazuo Ueda indicated that the policy-setting environment had shifted, and markets still priced a strong chance of a December rate increase.
Continued Yen Weakness
Ueda gave little guidance on the pace of future hikes, raising concerns that the Bank of Japan may struggle to keep pace with the Federal Reserve.
Currency outlook
Yen Support and Intervention
The latest intervention strengthened the yen by more than 6%, and hedge funds recently turned positive on the currency.
Continued Yen Weakness
Analysts said the external backdrop remains unfavorable, and the dollar-yen rate could keep climbing.
Key facts
- Friday move
- The yen fell as much as 1.3% against the dollar and ended at 156.88 per dollar.
- Monday level
- The yen steadied around 156.86 per dollar on Monday.
- Weekly performance
- The yen fell more than 2% last week, its biggest weekly decline in almost a year.
- Bank of Japan decision
- The Bank of Japan raised borrowing costs, with two board members dissenting.
- Rate expectations
- Markets priced less than a 20% chance of an October hike and almost a 90% chance of a December hike.
- Intervention spending
- Japan spent ¥15.4 trillion on intervention in the month through August 26, according to Finance Ministry data.
- Holiday period
- Japan’s holiday through Wednesday is expected to reduce trading liquidity.
Quotes
James Reilly
Senior markets economist at Capital Economics
“Like most other times the yen has gone into a BOJ meeting on the front foot lately, the BOJ has stopped it dead in its tracks. It seems fair to say that a material upturn in the yen’s fortunes vis-á-vis the US dollar will depend on the US side.”
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Joey Chew
Head of Asia foreign exchange research at HSBC Holdings Plc
“We were wondering if USD/JPY is on the cusp of change. We now assess that recent events can only stabilize USD/JPY rather than trigger a downtrend.”
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Koichi Sugisaki and Hiromu Uezato
Strategists at Morgan Stanley MUFG Securities
“Looking ahead, we think the external backdrop remains a headwind for JPY.”
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Sources
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