04.08.2023 – Tokyo has already counteracted the hoped-for turnaround in interest rates. The central bank recently had to intervene to prevent an implosion in government bonds. The market is puzzling over the yen’s further path.
After a brief rally, the yen has since shown weakness again. Here is the 4-hour chart of GBPJPY. The situation is hardly different for the euro and the dollar – higher interest rates prevail in these currency areas. Yesterday, for example, the Bank of England raised the key interest rate by 0.25 percentage points to 5.25 percent – this was the 14th interest rate step in a row. Japan, on the other hand, is shying away from normalizing its monetary policy – and is sticking with its key interest rate of minus 0.1 percent.
Source: Bernstein Bank GmbH
After all, the Bank of Japan last Friday hinted at a gentle departure from its previous monetary policy. The yield of Japan bonds should be able to rise to 1.0 percent instead of the rigid yield target of 0.5 percent. As recently as last Friday, Reuters had commented: “Bank of Japan’s opaque policy shift means stronger, wilder yen”. The yen has become wilder – but not necessarily stronger.
Was probably nothing
Because when the yield on Japan bonds reached a new nine-year high, the Bank of Japan got cold feet on Monday: Tokyo announced the purchase of bonds in the equivalent of 2 billion dollars. In doing so, the BoJ sent a signal: If necessary, stable bond prices are more important than a firm yen. Financial blog ZeroHedge judged, “And while the 10-year yield dropped back below 0.6%, the yen quickly reversed its advance against the dollar as FX traders realized that any attempts at tightening would lead to a collapse in the bond market.” We add: Which would plunge domestic banks and insurers into trouble.
Puzzling Interest Rate Turnaround Light
Loosening control of the yield curve was ultimately half-hearted, judged Win Tin, forex strategist at Brown Brothers Harriman. That will probably continue to weigh on the Japanese currency, he said on Bloomberg TV. The “Frankfurter Allgemeine Zeitung”, on the other hand, stated that Japan’s small interest rate turnaround has great significance for the USA. For Japanese investors – after all, the largest creditors of the United States – domestic yen investments have so far been unattractive. That is now changing.
The conclusion to be drawn from all this is that things remain exciting for the yen. After all, inflation of 3.3 percent on the Nippon is urgently calling for higher interest rates. On the other hand, the financial sector must not falter. The question of how the BoJ will extricate itself from this dilemma will probably toss the yen back and forth for a while. Traders with the right instincts can therefore make good money. Whether long or short – Bernstein Bank wishes successful trades and investments!
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