Affected by investors' concerns about the impact of the war in Iran on the economy and the Japanese authorities' difficulty in curbing inflation, the yen fell to its lowest level against the U.S. dollar in nearly four decades. During early trading in Tokyo on Tuesday, the yen-dollar exchange rate fell below the 162 mark for the first time since December 1986, with a cumulative decline of more than 3% during the year. The market has speculated that Japanese regulatory agencies may once again intervene in the market to support the currency.
The yen hit an intraday low of 162.27 yen per US dollar that day. Japan's Chief Cabinet Secretary Minoru Kihara reiterated the government's position at the morning press conference, saying that it is "ready and will take action at any time when necessary."
The yen has continued to weaken recently, with the exchange rate falling below its mid-2024 low. The core incentive behind this is market concern: Affected by the Iranian conflict that has pushed up oil prices, the Bank of Japan is more prone to policy lags in curbing inflation than other central banks around the world.
Japanese Prime Minister Takaichi Sanae announced a large-scale public-private collaborative investment economic growth plan in late June. The plan plans to invest the equivalent of US$2.3 trillion in funds over 14 years, but there are few details on fund allocation in the plan, which has once again triggered market concerns: Japan may continue to expand fiscal expenditures.
Lee Hardman, chief foreign exchange analyst at Mitsubishi UFJ Financial, said that the exchange rate falling below the 162 mark "once again highlights the weakness of the yen." "Energy price shocks continue to suppress the yen, while the Federal Reserve releases hawkish policy signals, further pushing up U.S. interest rates and boosting the strength of the U.S. dollar."
At the same time, some analysts believe that the recent surge in Japanese stock markets has also put downward pressure on the yen. Since the beginning of the new year, the Nikkei 225 Index has set new historical records one after another, reaching a high of 72,000 points last week. The main driving force for the increase came from overseas funds' large-scale purchases of artificial intelligence and semiconductor stocks.
Traders said that while foreign investors were long on Japanese stocks, they also carried out large-scale foreign exchange hedging operations, which created selling pressure on the yen.
From April to May this year, the Japanese authorities spent tens of billions of dollars in the market to support the yen. This time the exchange rate hit a new low, and the market speculated that the Japanese government might intervene in the foreign exchange market again. Prior to this, the Bank of Japan implemented verbal exchange rate testing operations in January.
Chris Turner, head of global market research at ING, said: "Japan should be aware that current foreign exchange intervention has little effect."
However, he added that Japan will not let the yen continue to depreciate, fearing that once the yen's plunge triggers the market's "selling off Japanese assets" sentiment, Japanese government bonds and the stock market will also be under pressure simultaneously; he predicts that Japan will still implement periodic intervention in the future.
Traders believe that another reason for the weakening of the yen is that the Bank of Japan has been slow to raise interest rates and has difficulty keeping up with rising inflation. Japan's inflation rate has gradually risen to 1.5% in May.
The Bank of Japan raised interest rates to "around 1%" in mid-June, a new high since 1995, but the trading market only expects to raise interest rates by 25 basis points before January next year. On the other hand, the Federal Reserve's current benchmark interest rate range is 3.5%-3.75%, and the market is expected to raise interest rates one to two times.
Columbia Global Portfolio Manager Ed Al-Husseini said: "The direction of the trend is very clear. The monetary policy of the Bank of Japan seriously deviates from the policies of Europe and the United States, and the Japanese yen is likely to remain weak."
He pointed out that the pressure on the yen stems from the slow pace of tightening policy by the Bank of Japan on the one hand and a major shift in fiscal policy on the other. "With Japan maintaining loose monetary policy, it has launched large-scale fiscal stimulus, which poses the risk of economic overheating."