(Bloomberg) — The yen slid beyond 163 per dollar for the first time since 1986 before recovering some ground in choppy trading on the prospect of faster interest-rate hikes from the Bank of Japan.
The currency fell to 163.24 per dollar on Tuesday, then briefly recovered to around 162.70 Wednesday after Bloomberg News reported that central bank officials are open to raising rates at a faster pace than the consensus among economists. That bounce faded, with the yen trading around 163.15 as of 4:15 p.m. in New York.
While the BOJ is widely expected to move rates roughly once every six months, it’s open to moving earlier than that timeframe if needed, people familiar with the matter said, pointing to signs that inflation is becoming entrenched.
Money markets added to wagers on a BOJ rate increase by October after the bank upped rates to 1% in June. Overnight-index swaps now imply around an 84% chance of a move in October, compared to a 72% likelihood seen before the Bloomberg report.
MUFG Bank strategist Lee Hardman said the report reinforces his view that the BOJ’s next rate hike could come as soon as September. Markets currently see only a roughly 32% chance of a move that month.
“It looks like another form of verbal intervention from Japan to try to provide more support for the yen,” Hardman said. “Japanese policymakers are facing an uphill battle to support the yen while the price of oil jumps back up towards $100 per barrel.”
The yen’s latest decline underscores how rising oil prices, Japan’s fiscal concerns and wide interest-rate differentials continue to overwhelm policymakers’ efforts to stabilize the currency. Currency weakness contributed to an unexpected widening in Japan’s trade deficit in June by inflating the value of imports, especially as the Iran war makes oil costlier.
Authorities spent ¥11.73 trillion ($71.9 billion) intervening in foreign-exchange markets between April 28 and May 27, but failed to prevent the yen from sliding to fresh 40-year lows.
Earlier on Wednesday, markets had shrugged off comments from Finance Minister Satsuki Katayama, who said authorities are ready to take “bold steps” if needed. Chief Cabinet Secretary Minoru Kihara also warned that officials would respond to currency movements appropriately.
What Bloomberg strategists say…
USD/JPY’s rally is developing a momentum of its own, suggesting traders would treat any official intervention as an opportunity to reload yen shorts rather than abandon the trade.
Japanese officials have threatened decisive action so often without following through forcefully that intervention warnings no longer trigger the knee-jerk dollar selling they once did.
At this point, it may take something more substantial to turn the tide: persuading GPIF to repatriate funds, or a sudden collapse in US yields that crushes the carry trade. The latter hardly looks imminent while oil prices are pushing higher and keeping inflation risks alive.
— Mark Cranfield, Markets Live Strategist, For the full analysis, click here.
Even before the latest comments, a series of policy initiatives had failed to stem the yen decline. Those included an economic and fiscal policy plan approved this week with a footnote stating that it leaves specific monetary policy decisions to the BOJ — an apparent effort to ease concerns that political pressure could delay rate increases. Officials have also floated proposals to encourage the country’s largest pension fund to invest more in domestic assets.
“It is a somewhat positive step to flag the possibility of faster hikes, but if they are unable to deliver then it could end up being more of a disappointment for the yen,” said Dominic Bunning at Nomura International Plc.
Meanwhile yen-watchers expect the currency to continue drifting lower. Technical indicators appear to back that view, showing bearish momentum in the yen is the strongest in three years.
“Absent any intervention, 165 appears to be the next major level the market will focus on,” said Rinto Maruyama, senior FX and rates strategist at SMBC Nikko Securities Inc.
–With assistance from Georgia Hall, Carter Johnson and Stephen Kirkland.
(Updates with latest prices, market movements.)
More stories like this are available on bloomberg.com
