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The weak yen hit a new 34-year low, plunging to 156 against the dollar, following the Bank of Japan’s (BoJ) decision to maintain its key interest rate. The Japanese currency has been on a downward trajectory since the last monetary policy meeting.
On Friday, the BoJ confirmed it would keep overnight call rates between 0 and 0.1%, adhering to the policy target set after abandoning the negative rate policy on March 19.
The weak yen is largely due to Fed policy, opines Ernst Glanzmann, Investment Director at GAM Investments. “Last year, many anticipated multiple rate cuts by the Fed throughout 2024. However, this narrative has changed. Now, the market is pricing in fewer than three rate cuts in the US for this year (compared to the initial expectation in early January of six rate cuts),” he said.
Goldman Sachs strategists noted last week that the global macroeconomic outlook appears unfavourable for the yen. They explained that investors have reduced their expectations for policy rate cuts due to the strength of the global economy. The strategists also added that the limited appeal of Japan-based assets for both domestic and foreign investors is unlikely to change, even with a slightly more aggressive hiking cycle by the BoJ.
Market observers now see the possibility of a further interest rate hike by the central bank as a possible means of slowing down the fall in the yen or even reversing the trend. However, many analysts believe that the BoJ will not make up its mind to do so until its next meeting in July.
“Assuming the recovery in real incomes and consumption is confirmed in the summer, the BoJ will likely raise its policy rate, arguing that the probability of meeting the 2% target has risen,” said Shigeto Nagai, Head of Japan Economics at Oxford Economics. “Although the weak yen is unlikely to be the main trigger for a rate hike, it will have some effect on inflation prospects through higher pass-through and inflation expectations.”
Portfolio Manager at Neuberger Berman, expects the Japanese yen to appreciate, if the Bank of Japan normalises monetary policy in this environment and the Federal Reserve and European Central Bank lower interest rates. “This will happen because of that narrowing differential as well as the capital that will be repatriated because of higher Japanese rates. That said, I think there’s going to be a lot of ups and downs in currency, just because of the uncertainties surrounding the US Fed’s next move and that every macroeconomic datapoint will be scrutinized by investors,” he added.
Okamura pointed out that it’s important to remember how many Japanese companies have adapted to currency volatility by relocating their production to their end-markets, which helps mitigate FX risks. He noted that many of these companies were profitable when the yen was trading at 70 – 80 against the US dollar, so there isn’t too much concern. However, he mentioned that volatility tends to be a risk factor.
