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Japan spent ¥9.8tn ($62bn) from late April to May to shore up the yen, but even expectations of an interest rate hike have resumed its slide to a 34-year low, highlighting Tokyo’s impending struggle to maintain its position. exchange rate.
Analysts say the Bank of Japan faces a “huge dilemma” as currency interventions have a swift effect on the yen, putting it under pressure to raise rates at a faster pace when the economy remains weak due to sluggish consumption.
The figure, released by the finance ministry on Friday, covers the period from April 26 to May 29, but market participants believe the amount was mostly spent in the four days from April 29, when Japan launched its first yen-buying intervention. From late 2022.
The yen briefly strengthened to ¥151.85 to the U.S. dollar after falling below ¥160 in late April, days after dollar reserves were sold to buy the Japanese currency. But the yen traded at ¥157.31 on Friday as investors continued to focus on the yawning gap between borrowing costs in Japan and the United States.
With the Federal Reserve expected to keep rates “high” and Japan’s rates close to zero, traders say the yen continues to be the global currency of choice for “carry trades,” where cheaply borrowed yen is used to finance other high-profile investments. resulting in assets.
Meanwhile, the yield on 10-year Japanese government bonds hit 1.1 percent on Thursday – the highest level since July 2011, raising expectations that the Bank of Japan will announce plans to cut government debt when it holds its policy meeting. June.
In March, the central bank made a historic shift in its ultra-loose monetary policy by ending eight years of negative rates. Earlier this month, the BoJ surprised markets by buying smaller-than-expected five- to 10-year Japanese government bonds during its regular operations.
In a speech earlier in the week, the BoJ’s deputy governor, Shinichi Uchida, sent dire signals to investors, saying Japan was close to overcoming decades of deflation. “While raising inflation expectations to 2 percent is still a big challenge for us, the end of our battle is in sight,” he said, pointing to wage increases and structural changes in the country’s labor market due to labor shortages.
But those expectations did little to reverse the yen’s stubborn weakness as investors hedged their bets that the BoJ would tighten its policy further.
“It will be difficult for the Japanese side to appreciate the yen until investors think interest rates will start to rise seriously,” said UBS economist Masamichi Adachi. That would mean the BoJ would have to raise rates by more than one percent in 2024 — a pace Adachi maintained because of weak domestic demand resulting from higher living costs.
“The BoJ is underestimating the weakness of the economy. This is a big dilemma,” he said.
