Will the US save the Japanese yen?
Over the last 15 years, the Japanese yen has steadily weakened, falling from around 76 yen per dollar to a recent low of nearly 164, with the dollar yen exchange rate reflecting the widening monetary policy gap between Japan and the US.
One of the main reasons is that for years the Bank of Japan kept interest rates extremely low to bring inflation back, encourage bank lending, and stimulate demand in the economy.
The thing is that inflation has finally returned, with the overall consumer price index rising 1.7% year-on-year in June, but the Bank of Japan cannot raise rates too aggressively because the country’s government debt is already enormous.
The carry trade also puts pressure on the yen. In short, investors borrow yen at very low rates, for example at 1.5%, convert it into dollars, and buy US bonds yielding around 4%. If the exchange rate stays stable, they make roughly 2.5% simply by borrowing in a cheap currency and investing in a higher-yielding one. The problem is that to make this trade, investors first need to sell yen and buy another currency, and when many investors do this at the same time, more yen gets pushed into the market.
Can currency intervention save the yen?
It hasn’t worked so far. Back in April, the Bank of Japan spent ¥11.7 trillion, or around $74 billion, to support the currency, and while the yen strengthened initially, the effect lasted only a couple of months.
But this time, besides spending over $80 billion last week buying yen, Japan also got support from the US, with the New York Fed conducting a rate check on dollar-yen trades on behalf of the US Treasury. Could it work this time?
The yen initially strengthened from 164 per dollar to 155, but this week it started weakening again, moving back above 157, because interventions don’t change the bigger picture.
In particular, US interest rates are still high because inflation remains elevated, with higher energy prices from Middle East tensions and ongoing trade conflicts adding more pressure. A resilient dollar index also highlights broad strength in the US currency, and as long as US yields stay attractive, the yen carry trade will remain profitable.
Japan can probably slow the yen’s decline for a while by using its foreign exchange reserves, but those reserves are not unlimited, and the only real long-term solution is a more dovish Fed and lower US interest rates, which still looks far away for now.
This article was written by IL Contributors at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
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