Following the coordinated currency intervention by the United States and Japan, the yen has risen to around 159 yen per dollar, threatening to breach the 160 yen mark. The effects of the intervention have diminished by more than half in just one week. Although speculative selling of the yen has significantly decreased, the continued demand for dollars for oil imports and the slow return of overseas profits to Japan are contributing to the yen's weakness.
On the morning of August 11, the yen-dollar exchange rate was trading at approximately 159.16 to 159.18 yen per dollar in the Tokyo foreign exchange market. Earlier, on August 10, the rate also briefly rose above 159 yen in the New York foreign exchange market. The yen's value has dropped to its lowest level since the U.S.-Japan intervention at the end of last month.
Before the intervention on July 30, the yen-dollar exchange rate was around 162.80 yen per dollar, but it fell to about 155.20 yen on August 3, marking a decline of 7.60 yen in just three days. However, within five trading days, more than half of that decline has been reversed. From a technical perspective, the current exchange rate falls within the so-called 50% retracement zone, a critical juncture that could determine future market trends. If this level is surpassed, market attention will shift to whether the post-intervention decline can be fully reversed.
Charts also reveal the limitations of the intervention. The 200-day moving average, which reflects the medium to long-term trend based on the average closing prices over the last 200 trading days, serves as a benchmark for trading and stop-loss orders. This time, it has acted as a barrier to yen appreciation. The yen-dollar exchange rate fell below the 200-day moving average immediately after the intervention but failed to stabilize at that level and has since risen again. The Nihon Keizai Shimbun noted on August 11 that the intervention has not changed the trend of yen depreciation. Christopher Rupkey, chief economist at FWDBONDS, stated that with the forex market expanding and trading capital increasing, "intervention alone is insufficient to change the direction of the exchange rate."
However, the intervention has not been entirely ineffective. According to the U.S. Commodity Futures Trading Commission (CFTC), the net short position in yen held by non-commercial entities, including hedge funds, decreased by 70% to 45,473 contracts as of August 4, marking the largest weekly decline on record. Mark Chandler, chief market strategist at Bannockburn Global Forex, remarked that the intervention successfully pressured speculators to cover their short positions in yen. Nevertheless, the yen has weakened again, as the Nikkei attributed this to persistent dollar buying by Japanese importers and other real demand.
Japan's international balance of payments data reveals a structure where the current account surplus does not lead to yen buying. According to statistics released by the Japanese Ministry of Finance on August 10, the current account surplus for the first half of the year reached 17.4292 trillion yen (approximately $154.8 billion), a 22.5% increase from the same period last year, marking the highest surplus on record for the first half of the year. Increased exports of automobiles to the U.S. and electronic components to Asia contributed to a trade surplus of 742.1 billion yen, the first surplus for the first half of the year since 2021.
Typically, a current account surplus generates demand for converting foreign earnings into yen, which would strengthen the currency. However, the average yen-dollar exchange rate for the first half of the year was 158.24 yen per dollar, up about 10 yen from 148.54 yen during the same period last year. Thus, while the surplus has accumulated, the value of the yen has actually declined.
The primary driver of the current account surplus was the primary income balance, which reflects dividends and interest received by Japanese companies from their overseas subsidiaries, amounting to 20.4914 trillion yen, the highest on record for the first half of the year. The issue is that a significant portion of these earnings does not return to Japan. Of the 15.9083 trillion yen in foreign direct investment during the first half of the year, over 40%, or 6.5086 trillion yen, was reinvested in overseas subsidiaries. Shotaro Kugo, a senior researcher at the International Monetary Fund, noted that the lack of yen buying demand corresponding to the absolute size of the current account surplus is due to the reinvested earnings remaining abroad.
In contrast, foreign direct investment in Japan amounted to 4.2623 trillion yen, falling short of 30% of Japan's outbound direct investment. Including securities investments, a total of 18.4893 trillion yen flowed out of Japan through the financial account in the first half of the year. Typically, a weaker yen would lead to increased domestic investment over foreign investment, creating yen buying demand that could mitigate yen depreciation. However, Japan's potential growth rate remains around the mid-0% range, and there is a labor shortage. Koya Miyamae, a senior economist at SMBC Nikko Securities, stated that domestic supply constraints, such as labor shortages, hinder adjustments through exchange rates.
Recent increases in oil prices are also intensifying pressure on the yen. The Iran-aligned Houthi forces in Yemen attacked Saudi oil facilities with drones, raising uncertainties surrounding energy transport. On August 10, West Texas Intermediate (WTI) crude oil futures briefly rose to around $82 per barrel. Japan, which heavily relies on resource imports, sees an increase in dollar demand from importers when oil prices rise, leading to a decline in the yen's value. In fact, the current account recorded a deficit of 92.3 billion yen in June, marking a return to negative territory for the first time in 17 months. The increase in import costs due to turmoil in the Middle East led to a 24.3% rise in import amounts compared to the same month last year, and the yen-denominated price of crude oil imports reached 117,684 yen per kiloliter, an 84.7% increase, the highest since 1979.
With investment earnings remaining abroad, stagnant foreign direct investment in Japan, and the burden of rising oil import costs, there are numerous reasons to sell yen. While the intervention may provide temporary relief, reversing this trend is challenging. Consequently, there is a growing recognition of the need for financial policy measures beyond intervention. The U.S., which unusually participated in yen buying at the end of last month, is also publicly supporting financial policy measures to correct the undervaluation of the yen. U.S. Treasury Secretary Scott Vessenet stated on X (formerly Twitter), "We strongly support financial measures to correct the significant undervaluation of the yen."
To prevent the entrenchment of yen depreciation, calls for an early interest rate hike are growing within the Bank of Japan (BOJ). In the minutes from the July monetary policy meeting released on August 10, several policymakers expressed a proactive stance on early rate hikes. One member noted that the pace of rate increases could be faster than market expectations. According to Dotani Research, the probability of a rate hike in September reflected in the interest rate swap market has risen to 67%.
Kazuo Monma, a former BOJ director and executive economist at Mizuho Research Institute, stated, "It has become difficult for the government to restrain the BOJ's interest rate hikes." This is due to the Takaiichi Sanae administration's emphasis on U.S.-Japan relations, making it challenging to disregard the U.S. desire for yen stability. The market has already begun to factor in a scenario where the current policy rate of 1.0% could rise to around 1.5% between this winter and next spring.
However, there is a variable this week. While there are concerns that intervention alone cannot change the trend of yen depreciation, Japan's Obon holiday, similar to Korea's Chuseok, begins on August 13, coinciding with the U.S. summer vacation period, leading to reduced trading volumes. This could result in significant fluctuations in the exchange rate, as even small amounts can sway the market. If the yen surpasses 160 yen per dollar, the likelihood of further intervention by authorities increases.
* This article has been translated by AI.
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