In just two days, the yen-dollar exchange rate plummeted by more than 5 yen, dropping from the low 160s to the mid-155s per dollar. This decline is attributed to growing expectations of accelerated interest rate hikes by the Bank of Japan (BOJ) and the possibility of the U.S. Federal Reserve maintaining its current rates this month, which could narrow the interest rate gap between the U.S. and Japan. Additionally, speculators who suffered losses from the joint yen-buying intervention at the end of July rushed to close their yen short positions, further amplifying the downward trend in the exchange rate. Although no actual intervention has been confirmed this time, concerns about potential intervention have prompted yen buying, leading to a 'short squeeze' as the yen-dollar rate fell. Market sentiment suggests that the unwinding of yen carry trades has begun.
According to the Nihon Keizai Shimbun (Nikkei), on September 3, the yen-dollar exchange rate fell to as low as 155.30 yen per dollar in the New York foreign exchange market, marking its lowest level in about a month. In the Tokyo market on September 4, the rate briefly dropped to 155.28 yen but rebounded to 156.10-156.12 yen by noon due to dollar buying from importers and other real demand. Compared to the previous day at 5 p.m., this represents a decrease of 0.93 yen.
Nikkei identified the initial trigger for the sharp decline in the exchange rate as proactive dollar sales by investors anticipating intervention by Japanese authorities. A foreign exchange dealer from a Japanese bank noted that on September 2, there were reports that Japanese authorities had conducted a 'rate check' with financial institutions to inquire about the exchange rate levels. As this speculation spread, the yen-dollar rate fell by about 1 yen in a short time, entering the 158 yen range. The rate then remained stable for a while.
Michael Ashley Shulman, a partner at Serity Partners, explained, "Many forex traders suffered losses from the joint U.S.-Japan intervention at the end of July. Because of that experience, when the rate rose to 160 yen per dollar this time, they bet on the possibility that authorities had already intervened and sold dollars." This proactive dollar selling led to further selling, and as the yen strengthened overnight in New York, yen buying intensified.
The second critical point was the 158 yen level. On September 3, when the yen-dollar exchange rate fell below the 200-day moving average (MA) of 158.44 yen in the Tokyo market, the pace of decline accelerated. The 200-day moving average is a key indicator for investors assessing medium- to long-term market trends. A representative from a major European bank observed that leveraged investors who had built up yen short positions in anticipation of a weaker yen began to close their positions to mitigate losses after the breach of the 200-day line, leading to a significant 'short squeeze.'
The yen carry trade involves borrowing yen at low interest rates to invest in higher-yielding currencies or assets to profit from the interest rate differential. When the value of the yen rises, currency losses can offset interest income, prompting investors to buy back yen to close their positions. Typically, as investors increase their investment size through borrowing, significant fluctuations in the exchange rate lead to preemptive selling to avoid larger losses. According to the Commodity Futures Trading Commission (CFTC), as of August 25, leveraged funds' net short positions in yen were more than double the average since 2020. Although these positions temporarily decreased right after the joint U.S.-Japan intervention at the end of July, they expanded again over the previous two weeks. A dealer from a Japanese bank in New York remarked, "Considering the exchange rate levels at which positions were built, some investors may be holding unrealized losses."
The shift in monetary policy expectations has also contributed to the decline in the yen-dollar exchange rate. Hajime Takata, a member of the BOJ's Policy Board, emphasized during a press conference on September 2 that the situation has "changed this year," suggesting the need for flexibility in determining the timing and magnitude of rate hikes, rather than adhering to the previous pattern of raising rates every six months by 0.25 percentage points. He mentioned that consecutive rate hikes are generally possible. The market is even discussing scenarios where the BOJ could raise rates every three months. Bloomberg reported on September 3 that the BOJ is likely to raise its policy rate by 0.25 percentage points to 1.25% at its monetary policy meeting on September 17-18.
In contrast, the Yomiuri Shimbun reported that Christopher Waller, a member of the U.S. Federal Reserve, stated during a lecture on September 3 that "recent indicators show signs of a slowdown in inflation," indicating that if this trend continues, there is no need to rush into rate hikes. Waller also expressed support for maintaining rates at the Federal Open Market Committee (FOMC) meeting on September 15-16 if inflation continues to ease. The probability of a rate hike in September, as reflected in the U.S. interest rate futures market, dropped from about 63% the previous day to around 50% on the morning of September 4 (Korean time). The expectation that the BOJ may raise rates while the Fed may delay its hikes has led investors to buy yen, anticipating a narrowing of the U.S.-Japan interest rate gap.
Speculation that Japan may adjust its financial and fiscal policies under U.S. pressure has also spurred yen buying. The U.S. Treasury revealed on September 1 that Treasury Secretary Scott Vessen received a strong endorsement from BOJ Governor Kazuo Ueda on August 30 for Japan to take decisive market and monetary policy actions to address the significant undervaluation of the yen. Following this, there have been several comments from Ueda and BOJ officials hinting at potential rate hikes. The New York Times reported that during a meeting in Tokyo in May, Vessen expressed dissatisfaction for two hours with Prime Minister Sanae Takaichi's aggressive fiscal stance and the BOJ's insistence on maintaining low interest rates.
It remains uncertain whether the recent sharp decline in the yen-dollar exchange rate will lead to a sustained strengthening of the yen. Hugo Monturiocchio, Chief Investment Officer at Schroders Multi-Asset, stated that recent interventions have only temporarily slowed the yen's depreciation, and the appeal of the yen carry trade still exists, leading him to maintain yen short positions. He added, "If the BOJ or the government sends a message indicating a desire for a stronger yen, it could lead to a trend reversal toward a stronger yen." Kit Jucks, a senior foreign exchange strategist at Societe Generale, noted, "While the yen carry strategy of selling yen to capture interest income has worked until now, it is becoming riskier. There is a possibility that this could mark a turning point for the yen to appreciate to 140 yen per dollar over the coming years."
The next critical moment will be the release of the U.S. non-farm payroll data for August on the night of September 4. If the employment figures are weak, expectations for a September rate hike in the U.S. may diminish further, strengthening the yen. Conversely, if the figures are stronger than expected, expectations for a U.S. rate hike may revive, potentially halting the decline in the exchange rate. Nikkei reported, citing a foreign exchange dealer from a Japanese bank, that whether the yen-dollar exchange rate can remain below the psychological resistance level of 155 yen per dollar, which has not been breached despite two interventions this year, will be crucial.
* This article has been translated by AI.
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