【MACRO Insight】The Japanese Yen Faces Another ‘Challenge’! Will Authorities Act Again in the Face of Resistance from Partner Countries?

In his speech on Wednesday, Seiji Adachi further emphasized that the central bank, when formulating policies, not only needs to consider the risks of economic downturn and deflation but also needs to pay attention to potential upside risks. He pointed out that while it is necessary to avoid premature rate hikes, excessive focus on downside risks could accelerate inflation, forcing the central bank to subsequently tighten monetary policy significantly.

He also emphasized that gradual adjustments to monetary policy would be necessary if core inflation continues to progress toward the 2% target. This suggests the possibility of rate hikes by the central bank, and he noted that the impact of yen depreciation on the timing of the central bank's next rate hike may become increasingly significant. Analysts expect that the central bank could take action as early as July.

Although the current Japanese economy is not robust, consumption, exports, and capital expenditure may pick up as households benefit from wage growth and overseas economies gradually recover. In other words, if significant yen depreciation pushes up inflation or if public expectations for future price trends exceed expectations, the Bank of Japan may consider raising interest rates. While short-term exchange rate fluctuations alone are not sufficient to change policy direction, if the yen continues to depreciate excessively and has a profound impact on inflation expectations, the central bank may adjust its interest rate policy.

In the latest developments in the foreign exchange market, the dollar rose to a high of 157.78 against the yen on Thursday morning, close to the levels seen at the end of April and early May when Japanese authorities were suspected of taking intervention measures. Although Japanese authorities have not confirmed whether intervention to purchase yen has occurred, based on deposits at commercial banks in the Bank of Japan and forecasts by securities firms, interventions of around 3.5 trillion yen (approximately $220 billion) may have been conducted.

Japanese Finance Minister Toshifumi Suzuki has repeatedly stated that he closely monitors the foreign exchange market and will take appropriate measures when necessary. However, the volatility of the yen has slowed compared to a month ago, and Japan needs to be vigilant against any potential resistance from its trading partners. U.S. Treasury Secretary Janet Yellen has once again emphasized that foreign exchange intervention should be a rarely used tool, and government officials should give reasonable warnings when deciding to intervene. This suggests that Japan may now find it more difficult to intervene in the market. Yellen previously stated that the Group of Seven (G7) has reached a consensus that exchange rate intervention will not be conducted unless it helps to contain extreme fluctuations.

Given Yellen's recent remarks, authorities may find it difficult to intervene when the yen's weakening pace slows down. With global bond yields rising, high-yielding currencies may continue to strengthen, putting pressure on the yen. The US dollar against the yen and other yen-denominated currency pairs may continue to rise, essentially quietly returning to the 160 level. The US Consumer Price Index edged down this month, leading to a softening of the US dollar against all major currencies.

Subsequently, US Treasury yields rose again, with the 10-year yield reaching 4.57%, the highest level in nearly four weeks. This was mainly driven by concerns over lackluster performance in Tuesday's auctions of two- and five-year Treasury notes, as well as factors such as data showing an unexpected improvement in US consumer confidence in May. Apart from the yen, most foreign currencies against the US dollar have risen since mid-April.

However, this trend may have come to an end, and we should anticipate a rebound in the US dollar. The yen is also influenced by carry trades, which involve borrowing low-yielding currencies to invest in high-yielding ones. Derek Halpenny, Global Market Research Director for Mitsubishi UFJ Financial Group in Europe, the Middle East, and Africa, pointed out in a report that with reduced forex volatility, traders' willingness to engage in carry trades has increased, indicating that the yen still faces significant downward pressure. He also noted that the euro against the yen and the pound against the yen have both risen.