The Zhitong Finance App learned that the yen suddenly strengthened sharply against the US dollar on Wednesday. At one point, it rose 1.2% to 158.22 yen to 1 US dollar, quickly triggering market speculation that Japan and even the US and Japan would once again interfere in the foreign exchange market. Meanwhile, Hajime Takada, one of the most hawkish policy committee members of the Bank of Japan, sent a stronger signal to raise interest rates, not only leaving the possibility for a larger rate hike, but also mentioned room for continuous rate hikes. As the Bank of Japan's interest rate meeting in September approaches, market expectations for a further tightening of Japan's monetary policy are clearly heating up.
The sudden rise in yen quickly spread to the global foreign exchange market. The Bloomberg US dollar spot index fell 0.3% intraday, the biggest intraday decline since August 21, while the emerging market currency index rose to an intraday high. Alex Cohen, a foreign exchange strategist at Bank of America, said, “The market is still highly wary of foreign exchange market intervention.”
It is currently impossible to confirm whether the sudden rise in the yen on Wednesday was related to official intervention. Monex forex trader Andrew Hazlett said that there were indeed rumors of interference in the market, but considering the magnitude of the yen's rise this time, he is skeptical. However, the simultaneous changes in the yen against the US dollar and the euro are also difficult to fully explain using other factors.
The US Treasury Department has yet to confirm whether it will participate in foreign exchange market intervention or conduct exchange rate inquiries that day.
The yen once surged by 1.2%, and the market is highly wary of another official move
The reason why this change in yen quickly sparked intervention and speculation is closely related to the Japanese government's recent large-scale support for the yen. According to data from Japan's Ministry of Finance, after the yen had previously fallen to its lowest level in about 40 years, Japan has spent a record amount of 96.4 billion US dollars to support the local currency in the past month.
More importantly, the US has rarely joined the operation before. About a month ago, Tokyo and Washington joined forces to buy yen. This is the first time since 1998 that the US and Japan have coordinated intervention in the yen exchange rate. At that time, the yen once fell to about 164 yen per dollar, the lowest level since 1986, and joint intervention helped the yen rise rapidly to close to 155, with a cumulative rebound of about 5%.
Since then, both the US and Japan have sent signals that if excessive and disorderly fluctuations occur in the foreign exchange market again, further joint action is not ruled out. Japanese officials have emphasized many times that whether to interfere in the foreign exchange market does not depend on a specific exchange rate level, but rather places more emphasis on how fast the yen depreciates and whether market fluctuations are out of order.
The yen suddenly rose sharply on Wednesday, making traders who are betting on a fall in yen wary once again.
The Bank of Japan is hawkish again: larger and more continuous interest rate hikes are not ruled out
In addition to potential official intervention, the Bank of Japan's policy expectations were also an important factor driving the yen's strength on Wednesday.
Bank of Japan policy committee member Takada Hajime sent a clearly hawkish signal on Wednesday, leaving the possibility of adopting interest rate hikes that exceed the normal range and continuous interest rate hikes. The Bank of Japan waited about six months before the latest rate hike in June of this year, so if the policy interest rate is raised again in September, it itself means that the pace of normalization of the Bank of Japan's monetary policy has accelerated markedly.
However, Takada Hajime further proposed the possibility of continuous interest rate hikes or even more drastic actions, which also made the market begin to think about whether the Bank of Japan will adopt a tougher austerity policy than previously anticipated.
Currently, the Bank of Japan's benchmark interest rate is 1%. The futures and swap market shows that investors have fully taken into account the possibility that the Bank of Japan will raise interest rates by 25 basis points at the September 17-18 meeting.
This means that for Bank of Japan Governor Ueda Kazuo, the September meeting has already formed quite high market expectations. If the central bank does not raise interest rates in the end, it will not only surprise the market, but may also cause the yen to depreciate sharply again.
Bezent continues to put pressure on the Bank of Japan to raise interest rates in September and is already at the cutting edge
The Bank of Japan is also under pressure from US Treasury Secretary Bezent. Recently, through public speeches, social media, and talks with Japanese officials, Bezent repeatedly urged the Bank of Japan to take appropriate monetary policy actions, and expressed the hope that Kazuo Ueda would “do the right thing” in monetary policy.
Earlier this week, Bezent also met with Kazuo Ueda during the G20 meeting in North Carolina, USA. The two sides discussed the importance of formulating stable inflation expectations and avoiding excessive exchange rate fluctuations through sound policies.
Kazuo Ueda later stated that the Bank of Japan will decide monetary policy on the basis of evaluating the risk of rising prices. This statement was interpreted by the market as the central bank did not plan to wait until October before acting.
Takata Hajime further sent hawkish signals on Wednesday, which further strengthened expectations for September's rate hike.
Ayako Fujita, chief Japanese economist at J.P. Morgan Chase Securities, said, “After the US has made such a statement, if the Bank of Japan still does not act, I think it will cause problems.” However, at the same time, she warned that if the market forms an impression that the Bank of Japan can only raise interest rates after receiving US support, then it may also weaken the policy effect of the interest rate hike itself.
Not raising interest rates may hit the yen, adding only 25 basis points may be “not enough”
This also made Kazuo Ueda face an increasingly difficult problem. If the Bank of Japan does not raise interest rates in September, the yen may experience a sharp sell-off when the market has almost fully taken into account the 25 basis point rate hike.
Another sharp depreciation of the yen may also push up the cost of imported goods and energy, thereby further increasing inflationary pressure within Japan. Currently, the market anticipates that Japan's inflation rate may approach 3% later this year. But on the other hand, even if the Bank of Japan raised the 1% policy interest rate by 25 basis points in line with market expectations, its boosting effect on the yen would not necessarily be very obvious. In particular, with Takada Hajime publicly mentioned a larger rate hike and the possibility of continuous rate hikes, the market's expectations for the strength of the Bank of Japan's policies may have further increased.
James Athey, fund manager of Marlborough Investment Management, said that the Bank of Japan needs to raise interest rates and release stronger policy signals, otherwise previous efforts to stabilize the yen may be weakened. He believes that the Bank of Japan's failure to raise interest rates in July was a critical mistake, because foreign exchange market intervention and political statements at the time had actually created conditions for further policy tightening.
The yen is still being suppressed by interest spreads between the US and Japan and fiscal concerns, and hedge funds re-establish shortness
Although official intervention and expectations of the Bank of Japan's interest rate hike provided support for the yen, the factors driving the yen's long-term weakening have not completely disappeared.
There are still large interest rate differences between Japan and other major economies, and Japanese Prime Minister Takaichi Sanae's aggressive fiscal spending plans have also heightened investors' concerns about Japan's fiscal outlook. Speculative capital is once again turning bearish on the yen. Previously, after the joint intervention of the US and Japan, hedge funds drastically reduced their short positions in yen, but recently they have begun to re-establish short positions.
In the face of continued pressure on the yen, it is reported that the Takaichi Sanae government is also currently supporting the Bank of Japan to further raise interest rates in the near future, and it is likely to take action in September as soon as possible.
Japan's 10-year treasury bond yield rises above 3%, global bond market linkage risk heats up
Another challenge facing the Bank of Japan comes from the bond market.
Recently, Japanese treasury bonds have continued to be sold off, and long-term interest rates have risen to the highest level since the mid-90s of the last century. Japan's 10-year treasury yield rose to 3% on Tuesday, reaching this level for the first time since 1996. Meanwhile, the yield on US 10-year Treasury bonds once approached 4.82% on Wednesday, rising to near the highest level since Benzent became US Treasury Secretary.
Japanese bond yields have long been viewed as an important “anchor” for global interest rates. As interest rates in Japan continue to rise, investors are increasingly worried about Japanese capital flowing back into the country from overseas markets, further impacting global bond assets such as US Treasury bonds.
Nobuyasu Atago, chief economist at the Rakuten Securities Economic Research Institute and a former Bank of Japan official, said that one of the reasons Bezent urged the Bank of Japan to raise interest rates is that he believes this will help control the rise in global bond yields, and this result is also in the interests of the United States.
Bessent has also previously stated that if the yen experiences extreme and disorderly fluctuations, it may eventually be transmitted to the US financial market and push up US interest rates. If the yen continues to depreciate, the Japanese government may sell some US Treasury bond assets to stabilize the local currency, which may further increase the long-term financing costs of the US. This is also one of the important backgrounds for the US to rarely participate in supporting the yen
The real problem may still be fiscal policy
However, there are still questions about the extent to which the Bank of Japan's interest rate hike can actually reduce long-term treasury bond yields.
One of the core issues facing the US and Japanese bond markets recently is investors' concerns that the government's fiscal deficit continues to widen. Neither the Takaichi Sanae administration nor the Trump administration have proposed a plan sufficient to fundamentally dispel the market's financial concerns.
J.P. Morgan's Fujita pointed out that the Bank of Japan cannot simply be blamed for the current rapid rise in long-term interest rates. She said that in order to truly ease the depreciation of the yen and the upward pressure on long-term interest rates, the Japanese government needs to send a credible fiscal policy signal to the market. This means that even if the Bank of Japan raises interest rates in September, monetary policy will not necessarily be able to solve the problems of weak yen and rising yields on long-term treasury bonds alone.
As the Bank of Japan meeting from September 17 to 18 approaches, the focus of the market is no longer just “whether to raise interest rates,” but is beginning to shift to “how much to increase, whether interest rates will continue to be raised, and how strong hawkish signals will be sent by Kazuo Ueda.”
With the 25 basis point rate hike in September already fully priced by the market, the US side continues to release policy pressure, and the yen still hovers near historic lows, any policy action by the Bank of Japan that falls short of market expectations may once again trigger sharp fluctuations in the yen and further test the determination of Tokyo and Washington to stabilize the foreign exchange market.