Damocles Sword Hangs Above the Yen, Threatening the 160 Threshold

　　On June 24, during Monday's early trading session, the yen fell to 159.94 against the US dollar, marking its lowest level since April 29 when it was at 160.245. As of the time of writing, the exchange rate stands at 159.71.

　　Image Source: Yahoo Finance

　　During the last episode of hovering around the 160 threshold, Japanese authorities intervened, admitting that between April 26 and May 29, they spent 9.8 trillion yen (613 billion US dollars) intervening in the currency market. Although the intervention dates were not specifically mentioned, based on foreign exchange reserve data, Japan likely sold US government bonds to fund this intervention activity.

Yen reaches the 160 threshold again

Federal Reserve speech

　　Following the speech by Federal Reserve officials, the US-Japan interest rate differential widened, leading to market selling of the yen and once again bringing the yen to the precarious 160 threshold. In response, Japan's highest monetary official warned that authorities are ready to intervene in the currency market at any time.

Bank of Japan delays bond reduction

　　At its June meeting, the Bank of Japan kept short-term rates unchanged in the range of 0-0.1%, indicating that even if short-term rates are raised, it will not significantly affect the economy due to inflation exceeding the 2% target for two consecutive years. Meanwhile, the Bank of Japan (BOJ) decided this month to postpone reducing bond purchases under stimulus measures until its July meeting, putting the yen under pressure again. In June, the yen depreciated by 1.4%.

　　Kanda Masato, Vice Minister of Finance, said, “If exchange rate fluctuations are too large, it will have a negative impact on the national economy. However, if the large fluctuations are due to speculation, the authorities will take appropriate action.”

　　Many market participants predict that the Bank of Japan will raise interest rates again at some point this year, but whether it will be in July or later remains undecided.

　　The depreciation of the yen adds complexity to the Bank of Japan's policy path. While yen depreciation helps maintain inflation above the 2% target, it also raises import prices, increasing household living costs and damaging consumption.

Japanese households invest overseas

　　Japanese households are accelerating the sale of yen. From January to May this year, domestic investment trust management companies and other institutions purchased a net amount of over 56 trillion yen overseas, exceeding last year's total of 45 trillion yen. This reflects individuals expanding their overseas investments within the framework of the new NISA (Nippon Individual Savings Account) system.

　　Image Source: Nikkei

　　When Japanese individuals purchase foreign stock-type investment trusts, they engage in selling yen and buying dollars, among other operations, which becomes a factor in pushing down the yen exchange rate. Many perspectives believe that even if the interest rate differential between the US and Japan narrows, the strong momentum for yen selling under actual demand will persist.

　　The new NISA (Nippon Individual Savings Account) is a tax-exempt investment system introduced by the Japanese government aimed at encouraging individual investors to participate in the capital markets, increase long-term investments, enhance market liquidity, and promote investment culture and long-term investment awareness. Specifically, the new NISA system allows eligible individual investors to purchase stocks, investment trusts, ETFs, and other assets in designated investment accounts and enjoy tax-exempt treatment for a certain period.

Outflow of overseas funds

　　Interest among overseas investors in purchasing Japanese stocks is declining. Although the rise in undervalued stocks supported by improvements in capital efficiency has driven market trends, concerns about US economic dynamics and European political risks are increasing. Funds are beginning to flow into high-quality Japanese stocks. Outflows of overseas funds are also putting pressure on the yen.

Authorities' measures to rescue the yen

　　Initially, the market expected the Bank of Japan to begin reducing its purchases of government bonds at its June meeting, but the Bank of Japan announced that it would postpone this decision until its next meeting in July. This move is interpreted as the central bank holding a cautious stance on tightening policies, especially considering the impact of the widening US-Japan interest rate differential on yen depreciation.

　　Due to weak consumer spending and a safety scandal in the automotive industry leading to economic contraction in the last quarter, the Bank of Japan also needs to assess the effects of these factors. Therefore, it is understandable that they have paused the continuation of the current monetary easing policy. It is also necessary to avoid excessive easing leading to higher import prices, increasing household living costs, and suppressing consumption.

　　The Bank of Japan stated that it will formulate a plan to reduce bond purchases by the end of July, which will serve as the first step in Japan's quantitative tightening. The central bank will also hold meetings with market participants next month.

　　Regarding Japanese government bonds, some members suggest that it would be best to gather opinions from market participants before making decisions. This could help the central bank significantly reduce its purchases of Japanese government bonds.

Future development of the yen

　　Despite Japan's government taking a firm stance again, the market remains cautious about the yen's prospects. Analysts point out that under the backdrop of a continuing widening of the US-Japan interest rate differential, the pressure for yen depreciation is unlikely to be fundamentally eased in the short term. Investors will closely monitor the future actions of the Japanese government and recent policy trends by the Federal Reserve, which will collectively influence the yen exchange rate trend.

　　Image Source: investopedia