Yen tumbles as prospect of Bank of Japan rate hike fades
If the yen slumps toward the key 160 level against the dollar, it could prompt intervention and complicate U.S.-Japan trade relations.
The yen has tumbled to its weakest levels against the dollar since February, on diminished prospects for a Bank of Japan rate increase after the weekend heralded a more dovish government.
Markets will be closely watching to see if the yen slumps toward the key 160 level, at which intervention could be more likely.
A major driver of the yen’s drop was Sanae Takaichi’s election on Saturday as the president of Japan’s ruling Liberal Democratic Party. She favors a “high-pressure" economy and looks on course to become the next prime minister, economists at SMBC Nikko Securities said in a research report.
Takaichi is widely perceived to be a supporter of looser fiscal and monetary policies. That is damping bets that there will be another rate increase this year, though consumer inflation has stayed well above the BOJ’s 2% target this year, bolstering the case for tighter monetary policy.
“For the near term, the focus is going to be on what pressure is brought to bear on the BOJ," ING’s Chris Turner said in a research report.
Markets are now pricing just a 20% probability of a BOJ rate increase at this month’s meeting, said Turner, ING’s global head of markets. “A delay in a hike into next year or even later will further weigh on the yen," he added.
Since the LDP election, the dollar has surged to its highest levels against the yen since mid-February. It was recently trading at 152.41 yen on Wednesday, from around 147 yen before the weekend, LSEG data show.
“Any delay in the formation of a new cabinet under the next prime minister will likely impede communication between the Bank of Japan and the government, constraining the BOJ’s management of monetary policy," the SMBC Nikko Securities economists said. “Delaying rate hikes will in turn stoke further yen depreciation," they said.
With little time left before the Bank of Japan’s meeting on Oct. 29-30, “we think it will be very difficult for the BOJ to hike rates after sufficiently communicating with the incoming new government," they added.
If the yen continues to weaken toward 160 against the dollar, “the issue could become a sticking point in the trade relationship" between the U.S. and Japan, Sumitomo Mitsui Banking Corp.’s chief FX strategist Hirofumi Suzuki said.
A much-weakened yen would be detrimental to the White House’s attempts to narrow the U.S.’s trade deficit with Japan and complicate any future U.S.-Japan trade negotiations, at least from Tokyo’s perspective.
If the dollar strengthens past the 161.99 yen level hit in July 2024, the Japanese currency would be trading at levels not seen since 1986, according to LSEG data.
Should the yen’s depreciation quicken with the dollar reaching near 160 within one to two weeks, “[foreign-exchange] intervention by the Japanese government would be viewed as more likely," said Suzuki.
Write to Ronnie Harui at ronnie.harui@wsj.com
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