Stella Zhao, head of developed Asia credit at UBS Asset Management, indicated her readiness to sell yen if Japanese authorities intervene in the currency market again. Zhao believes that such interventions are unlikely to be effective in reversing the yen's depreciation, especially if they occur during periods of low liquidity such as holidays, suggesting that the fundamental drivers for a weaker yen remain strong.
The yen has been under significant pressure, recently trading around 157 per US dollar. This follows a 2% drop last week, despite the Bank of Japan (BOJ) raising interest rates to 1.25% on Friday. However, the BOJ's dovish stance, including two dissenting votes and a lack of aggressive forward guidance, disappointed investors and failed to significantly boost the currency. Analysts like Thomas Mathews of Capital Economics suggest that a more substantial decline might be needed before intervention becomes a strong consideration again, despite recent rate checks.
The primary factor driving the yen's weakness is the widening interest rate differential between Japan and the US. The Federal Reserve's hawkish stance, with a unanimous decision to raise policy rates, contrasts with the BOJ's cautious approach. Mark Chandler, chief market strategist at Bannockburn Global Forex, noted that the yen is more sensitive to US interest rates than Japanese rates, leading to yen selling and dollar buying as US bond yields rise. This dynamic makes sustained yen appreciation challenging even with intervention efforts.
Japanese authorities have intervened in the past, including a significant $15.4 billion intervention in the month through August 26, which temporarily strengthened the yen. There was also a coordinated intervention with the US in late July that lifted the yen by over 6%. However, these interventions have typically provided only temporary relief, as the underlying economic fundamentals, particularly the interest rate gap, continue to exert downward pressure on the yen. The expectation among some market participants, including a fund manager from a British asset management firm, is that such interventions cannot continue indefinitely without addressing the root causes of the yen's weakness.
