Column: The reality of the dollar breaking above 152 yen is strongly influenced by Japan-U.S. monetary policy – Minoru Uchida | Reuters

2024-02-28 09:23:14

[28th (Reuters)]- The dollar/yen pair has recovered to the 150 yen level for the first time in three months. The weak yen is playing a role in the rise in stock prices, and the so-called “bad yen depreciation theory” is disappearing, but the upside appears to be heavy due to caution against intervention.

In this article, we will review the pros and cons of a weaker yen and look at the possibility of the yen reaching the 152 yen level, which it bounced back to in 2022 and 2023.

While the Nikkei Stock Average (.N225), opens new tab is reported to be on the rise every day, there is a sense of stagnation in the domestic economy. This is probably because real wages continue to decline, mainly due to imported inflation, putting pressure on household budgets. Personal consumption stalled in the second half of 2023, recording negative growth for two consecutive quarters. When the yen is weak, import prices tend to rise more than export prices, and the terms of trade (=export price index ÷ import price index) worsens.

As a result of the easing of the rising trend of resource prices, it shrunk from 2022, but trade losses last year were still the largest ever at approximately 11.1 trillion yen. This trade loss pushes down real gross domestic income (GDI) by that much. Adding approximately 34 trillion yen of income earned overseas to GDI yields gross national income (GNI), and much of this income is received exclusively by corporations.

Moreover, the proportion of stocks and investment trusts in Japanese households’ financial assets is around 10%, which is extremely low compared to Europe and the US, making it difficult for the wealth effect to work.

Based on the above, the weak yen is a tailwind for companies, as symbolized by the rise in stock prices, but it can be concluded that it is a strong headwind for households unless wage increases exceed the rise in prices.

On the other hand, some people welcome the weaker yen from an inbound perspective. The number of foreign visitors to Japan in 2023 was approximately 25.06 million, and inbound consumption reached a record high of approximately 5.3 trillion yen, which is expected to have a ripple effect on local economies.

Inbound consumption corresponds to service exports in the national accounts, so when comparing the export value by item, inbound consumption is less than that of automobiles (approximately 17.3 trillion yen), which is the largest, but semiconductors are the second largest. This is comparable to other electronic components (approximately 5.5 trillion yen). Furthermore, the number of foreign visitors to Japan is expected to increase in 2024, and inbound consumption is likely to develop into an export industry second only to automobiles.

However, in light of the aforementioned trade losses and imported inflation, the possibility of foreign exchange intervention will increase as the dollar/yen pair strengthens further. The problem can be said to be its effect on suppressing the yen’s depreciation, but as I showed in my previous column, “The high wall that prevents the yen from appreciating after negative interest rates are lifted,” that point is questionable.

This is because after the intervention in September 2022, which was carried out when the dollar was strong, the rate of appreciation of the dollar/yen soon became higher than that of other currency pairs. Even after the intervention in October of the following year, when the dollar was weakening, there was no significant difference in the rate of decline of the dollar/yen compared to other currency pairs at an early stage.

Of course, it is impossible to compare the situation with the situation without foreign exchange intervention, and this does not deny its effectiveness, but the key to stopping the yen’s depreciation is likely to be overcoming the yen’s weaknesses, not foreign exchange intervention. This is clear from the fact that the yen is weaker now than it was in 2022, when foreign exchange intervention was implemented.

Specifically, the yen’s weakness is Japan’s real interest rates, which are in negative territory, and unless this changes, the yen will continue to be under downward pressure.

＜Ｔｈｉｓ　ｔｉｍｅ　ｉｓ　ｄｉｆｆｅｒｅｎｔ＞

So, will it reach the 152 yen level this time? In conclusion, the possibility is not low. This is because the market’s view of US monetary policy is clearly different from the previous two periods. For example, in the case of October 2022, speculative reports indicate that the US Federal Open Market Committee (FOMC) will discuss adjusting or slowing down the pace of interest rate hikes in November, along with concerns about the dollar’s high price. , the dollar’s strength peaked out, and the dollar/yen pair also fell.

In the case of 2023 as well, at the FOMC’s post-meeting press conference in November, Chairman Powell mentioned the possibility that rising long-term interest rates would reduce the need for further rate hikes, which was perceived as dovish. Subsequent employment statistics and consumer price index (CPI) were also lower than expected, giving rise to a sense of slowdown in the US economy. At the same time, Waller, who has been seen as a hawk, made remarks that could be interpreted as approving a rate cut, and as a result, the dollar depreciated.

Thus, in both cases, the dollar/yen pair stalled just before reaching the 152 yen level, as a result of a shift in US monetary policy views toward a dovish one and a depreciation of the dollar.

However, the current situation is quite the opposite. Strong economic data since the beginning of the year has begun to reduce expectations for interest rate cuts that pushed down the dollar towards the end of last year. It would not be surprising if something triggered the dollar to rise again, and in that case, there is a strong possibility that the dollar/yen would also appreciate accordingly.

Moreover, compared to the fall of 2022, when there were concerns that a strong dollar would have a negative impact on the economies of emerging countries, the current dollar index is more than 9% lower than it was then. Even if the dollar were to appreciate a little from now on, it would not immediately develop into an international problem.

In this regard, not only the better-than-expected price-related economic indicators, but also the so-called dot chart, which is the FOMC’s forecast distribution of policy interest rates in March, could be a trigger for the dollar to rise again.

In December of last year, the dot chart showed that the median price for the end of 2024 was revised downward from 4.875% in September last year to 4.625%, which sent the market into a dovish shock. The dollar index and the dollar/yen both plunged on expectations that there will be one more rate cut in 2024.

However, based on the weighted average of 19 responses, it was only a decline of about 9 basis points compared to September last year. In reality, participants were quite evenly divided as to whether they viewed the optimal number of interest rate cuts in 2024 as two or three. If only two of the participants who voted for 4.625% changed their minds to 4.875%, the median would return to 4.875%. In that case, a corresponding shock to the dollar’s strength is expected.

Also, caution should be taken when the Bank of Japan decides to lift negative interest rates. Although the timing of the lifting of negative interest rates may differ, it can be said that the market has already factored it in, and attention has shifted to the subsequent policy stance and rate hike path.

On that point, since the output gap in the Japanese economy is still in the negative zone (= demand shortage), even Governor Kazuo Ueda, who has said that he would focus on upward trends, may declare a phase of sustained interest rate hikes. gender is low.

Rather, it is likely that the Bank will emphasize the point that monetary easing will continue while showing that real interest rates will remain negative. This would be equivalent to emphasizing that the yen’s greatest weakness remains intact, and could lead to renewed expectations for a weaker yen.

Looking at it this way, the reason why the price has bounced back below 152 yen so far is not because there is a thick ceiling there, but rather because it has been helped by the fall in the dollar. There is a possibility of foreign exchange intervention, but it will likely be limited to a smoothing operation and will not be a decisive move to stop the yen’s depreciation.

In the future, there are risks of adjustments in major stock indexes that have reached record highs in both Japan and the United States, slump in the commercial real estate market mainly in the United States and resulting concerns for small and medium-sized financial institutions, prolonged economic slump in China, and various geopolitical risks. While paying close attention to these factors, it is necessary to recognize that the risk of the dollar/yen pair is tilted to the upside.

Editing: Kazuhiko Tamaki

(This column was posted on the Reuters Foreign Exchange Forum. It is written based on the author’s personal views)

*Mr. Minoru Uchida is an associate professor at the Faculty of Commerce at Takachiho University and a foreign exchange analyst at FDAAlco. After graduating from Keio University, he joined the Bank of Tokyo (currently Mitsubishi UFJ Bank). He has held positions in market operations and was chief analyst for foreign exchange from 2012 to 2022. Current position since April 2012. In J-money magazine’s Tokyo foreign exchange market survey, it has been ranked No. 1 in the individual ranking for nine consecutive years since 2013. He is an Internationally Certified Investment Analyst, an editorial board member of the Securities Analyst Journal, a visiting researcher at the International Monetary Institute, and a master’s degree in economics (Kyoto Sangyo University).

*The content such as news, trading prices, data and other information in this document is provided by the columnist for your personal use only and is not provided for commercial purposes. there is no. The content of this document is not intended to solicit or induce investment activities, and it is not appropriate to use this content for the purpose of making decisions when trading or buying or selling. This content does not provide any investment, tax, legal, etc. advice that constitutes investment advice, nor does it make any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document is not intended to replace investment advice from a qualified investment professional. Although Reuters uses reasonable efforts to ensure the reliability of content, any views or opinions provided by columnists are their own and not those of Reuters.

Our code of conduct:Thomson Reuters “Principles of Trust”, opens new tab

1709115068
#Column #reality #dollar #breaking #yen #strongly #influenced #JapanU.S #monetary #policy #Minoru #Uchida #Reuters