Source: AFP
The JPY has hit new 24-year lows of 144 against the USD and is now in sight of its major 1998 low of 147-148 as the first chart shows.
Source: Bank of Singapore, Bloomberg.
The JPY is sliding fast after Federal Reserve Chairman Powell was hawkish at the central bank’s annual symposium in Jackson Hole, signalling the Fed would keep lifting interest rates aggressively to curb inflation. In contrast, Governor Kuroda reiterated the Bank of Japan would stay dovish and make no changes to its policy of capping 10Y Japanese Government Bond (JGB) yields to keep financial conditions loose and spur inflation in Japan. As the second chart shows, core inflation - when excluding food and energy costs - is still only 1.2% in Japan and thus below the BoJ’s 2% target.
Source: Bank of Singapore, Bloomberg.
In 1998, the JPY plunged as local banks struggled to recover from the bursting of Japan’s 1980s bubble and the worsening Asian Financial Crisis kept the BoJ dovish. The USD was also supported by the hawkish Fed keeping its fed funds interest rate high at 5.50% to counter inflation. In response, the Bank of Japan, on behalf of the Ministry of Finance, intervened to defend the JPY by selling USDs as the first chart shows. But the action was unsuccessful. The USD rose to 147-148 and only peaked when Russia defaulted on its bonds. The shock forced hedge funds to cover their losses in Russia by unwinding their profitable JPY shorts, causing the USD to tumble and to end the year around 115 against Japan’s currency.
In 2022, the JPY is set to plunge again towards its 1998 lows of 147-148 unless a shock makes the Fed or the BoJ shift stance. Cabinet Secretary Matsuno warned: ‘the government will continue to watch foreign exchange market moves with a high sense of urgency and take necessary responses if this sort of move continues.’ But officials will be aware that intervention is unlikely to stop the JPY sliding without the Fed turning less hawkish or the BoJ abandoning its dovish stance on inflation. Thus, the authorities may stay on the sidelines and hope the USD will peak once the Fed’s rate hikes near their end. But the risk here is that investors may test Japanese officials by pushing the USD to even higher levels than those of 1998. The first chart shows the JPY was as weak as 150-160 in 1990, a scenario that can’t be ruled out now as the USD keeps overshooting rapidly.
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