Report by Intermoney
The yen’s downward trend has continued to intensify in recent trading sessions, consolidating above 160 USDJPY – a level that had previously served as a threshold at which the Ministry of Finance would actively intervene in the market to support the yen. With the pair closing on Wednesday at around 162.22, the Japanese currency has reached its lowest levels against the US dollar in 40 years. As we analysed following the Bank of Japan’s last meeting, the path to interest rate normalisation is proving too slow to reverse the currency’s prolonged weakness, as evidenced by the fact that the Japanese currency has continued to lose ground following the rate rise two weeks ago. Another aspect we have also been highlighting in our reports is the limited effectiveness of interventions (except in the very short term), which should deter the Ministry of Finance from continuing to resort to stopgap measures.
The fact that the yen is not reacting to the BoJ’s rate rise suggests that other issues are weighing more heavily on the market. In particular, concerns about the sustainability of Japan’s public finances are growing.
Takaichi revealed further plans for her massive stimulus programme for public and private investment aimed at economic growth. The proposed plan would involve investment equivalent to JPY 370 trillion (US$2.3 trillion) over 14 years, although the relative lack of detail on how the funding would be allocated has reignited concerns that she has set Japan on a path towards greater fiscal expansion.
So far, only a few details have been released, such as the allocation of $600,000 million for artificial intelligence and semiconductors.
Whilst concerns about fiscal imbalances are a structural factor exerting downward pressure on the yen, this has been compounded by more short-term factors such as the appreciation of the dollar and the search for dollar-denominated safe-haven assets, whilst expectations of higher interest rates rose in the US under a more hawkish Fed. And with Warsh taking the helm in his first address to the markets (on the day of the meeting), the dollar soared. Despite the very brief press conference, the chairman reaffirmed a core commitment to price stability, emphasising that the Fed had failed to meet its inflation target for five consecutive years and would not allow that to happen again.
