As the yen slipped below 145 per dollar, drawing minimal response from Japanese policymakers in recent days, speculations arose about their hesitation to order intervention as quickly as they did last year. This shift is driven by the potential benefits they are reaping from a weakened currency.
The remarkable growth of exports contributed to an annualized economic growth rate of 6% in the second quarter, while reduced global oil prices played a role in containing the import bill.
However, the significant factor behind the yen’s decline remains unchanged: the substantial yield gap with the United States. The Bank of Japan is cautiously moving away from its ultra-loose monetary policy, and there is growing optimism that U.S. rates might have reached their peak. Nevertheless, the bond market currently provides a strong incentive to sell yen.
Currency traders, despite recognizing the yawning gap, are wary of provoking intervention. The yen has now entered the same range that led Japanese authorities to heavily sell the dollar in September and October of the preceding year.
On Tuesday, Finance Minister Shunichi Suzuki issued a reminder against inciting exchange rate volatility, as the yen touched a 9 1/2-month low of 145.60 during Asian trading.
Suzuki emphasized the undesirability of rapid movements and stated that the government is prepared to respond suitably. He reiterated that specific levels aren’t targeted for intervention.
In June, officials were more vocal when the yen weakened beyond 144. However, their subdued reaction to the recent depreciation suggests to market participants that Tokyo may tolerate a bit more weakening, provided speculators avoid hastening the process.
Aaron Hurd, a Senior Portfolio Manager at State Street Global Advisors in Boston, remarked, “The pain associated with the 145-150 level is less now for the economy, so I don’t think they’ll be quite as aggressive as they were last year.”
Hurd suggested that if the dollar-yen rate’s upward trend is gradual, intervention might not occur until it reaches “around 150 or a little bit above.”
Currently, traders are testing the waters by selling yen against sterling and the Swiss franc, cautious of the potential for swift momentum if selling against the dollar gains traction.
