Reports said the exchange rate had risen above 160 yen per dollar, while analysis also indicated that USD/JPY had turned lower.
Why does one side describe this as a resumption of yen weakness, while the other discusses the possibility of yen strength?
The key is not so much the current level itself as the Bank of Japan’s rate path and the impact its remarks will leave on the market.
3-Line Summary
1. Trading above 160 yen for USD/JPY was reported
2. One bank mentioned the possibility of levels around 164 yen
3. The persistence of rate-hike remarks is a variable
Trading Above 160 Yen and the Warning Around 164 Yen
The dollar-yen exchange rate refers to the amount of yen needed to buy 1 dollar. When the number rises, it is read as a decline in the yen’s value against the dollar. Although the keyword was observed in searches conducted in Japan, that alone does not establish that the actual trading location or the headquarters of the reporting outlet was in Japan.
The Japan Times, an English-language Japanese newspaper, reported that trading above 160 yen per dollar appeared for the first time in nearly a month during U.S. trading hours and remained above that level again on Monday. The report also included a warning from a Tokyo-based bank that, absent a special catalyst to stop the yen’s decline, the yen could return to around its lowest level in 39 years.
Sumitomo Mitsui Banking Corporation said in a report that the dollar could gradually return to just below 164 yen, the high before intervention. However, this was the bank’s forecast, not a confirmed fact that the exchange rate had reached 164 yen. The large-scale intervention at the end of July, as reported by The Japan Times, was also mentioned in the context that support for the yen at the time did not last long.
Here, 160 yen and 164 yen are not numbers of the same nature. The former was a level reported to have been traded at the time of the report, while the latter is the bank’s projected range on the assumption that there is no significant catalyst. The two numbers should not be placed side by side and read as, “Since it rose above 160 yen, 164 yen is also certain.”
Bank of Japan Board Member Mentions Consecutive Hikes
Materials pointing in the opposite direction also emerged. The foreign-exchange broker FOREX.com analyzed that USD/JPY had turned lower, breaking the upward trend that had continued since August 20. The background cited by the outlet was a remark by Bank of Japan policy board member Hajime Takata.
In remarks delivered in Sapporo, Japan, Takata said that the pace of rate hikes should be judged at every meeting and that it should not be assumed that tightening would continue at roughly six-month intervals, as it had so far. He also publicly raised the possibility of consecutive rate hikes. This was not an announcement that an actual hike had been decided, but rather a policy board member’s position that the pace of hikes could be accelerated.
FOREX.com explained that Takata had previously supported higher interest rates and was the most hawkish figure within the Bank of Japan’s Policy Board. Accordingly, rather than concluding that the remarks alone had changed the Bank of Japan’s overall decision, it is more important to consider how seriously the market had begun to take the possibility of rate hikes.
Bank of Japan Governor Kazuo Ueda was also reported to have said, after the close of the Group of 20 (G20) finance ministers’ meeting held in the United States, that he was closely monitoring exchange-rate movements as one of the risk factors in the inflation outlook. This indicated an awareness that a weak yen could increase inflation risks through import prices. However, he did not promise a rate hike in September.
Why Short-Term Government Bond Yields Moved First
FOREX.com reported that Japan’s government bond yield curve sharply flattened after the remarks. The 2-year yield rose 6.2bp, the 5-year yield rose 5.5bp, but the increase in the 10-year yield was only 2.5bp, while the 30-year yield fell by approximately 1.3bp. Since bp means 0.01% point, this means that the movement in short-term bonds was larger.
This difference can be interpreted as a sign that the market first responded to the possibility of a rate hike in the near term, rather than to a broad rise in long-term interest rates. The yield spread between the 2-year and 30-year bonds was reported to have narrowed by approximately 7.5bp. FOREX.com assessed that a one-day move of this magnitude was extremely rare by change standards since 2007.
However, the same analysis included the caveat that these figures could continue to change because the market had not yet closed. This is why it is difficult to immediately connect the turn lower in the exchange rate and the sharp rise in short-term interest rates to sustained yen strength. Policy board member remarks, the governor’s view of inflation, and decisions made at an actual meeting are separate stages.
The key contrast when reading this USD/JPY move is clear. On one side are trading above 160 yen and a bank’s conditional forecast toward around 164 yen; on the other is a movement reflecting the market’s pricing of the possibility of faster rate hikes. Rather than asserting the direction of the exchange rate, it is necessary to watch together whether the Bank of Japan actually adopts consecutive hikes as policy and how heavily the yen’s weakness is reflected in its inflation assessment.
References
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