Home ForexDaily Briefings Japan's $62 billion yen support offers little respite

Japan's $62 billion yen support offers little respite

by SuperiorInvest

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Japan spent a record 9.8 trillion yen ($62 billion) from late April to May to boost the yen, but the currency has resumed its slide toward 34-year lows even as expectations for rising rates rise. interest rates, highlighting the struggle Tokyo faces to stabilize its currency. exchange rate.

With monetary interventions having only a fleeting effect on the yen, analysts say the Bank of Japan faces a “huge dilemma” as it is pressured to raise rates at a faster pace when the economy remains weak due to sluggish consumption.

The figure, released by the Ministry of Finance on Friday, covers the period from April 26 to May 29, but market participants say they believe the amount was mainly spent over the course of four days starting April 29. , when Japan carried out its first yen buying intervention. from the end of 2022.

In the days after selling dollar reserves to buy Japanese currency, the yen briefly strengthened to ¥151.85 per US dollar after falling below ¥160 in late April. But the yen was trading at ¥157.31 on Friday as investors continued to focus on the yawning gap between borrowing costs in Japan and the United States.

With the Federal Reserve expected to keep rates “higher for longer” while Japan’s rates remain near zero, traders say the yen remains a favorite global currency for the “carry trade,” where the yen Borrowed at a low price is used to finance investments in other higher currencies. productive assets.

Meanwhile, 10-year Japanese government bond yields hit 1.1 percent on Thursday, the highest level since July 2011, with growing expectations that the Bank of Japan will announce plans to reduce its debt purchases. public when it holds its policy meeting in June.

In March, the central bank made a historic turn in its ultra-loose monetary policy by ending eight years of negative rates. Earlier this month, the Bank of Japan also surprised markets by purchasing a smaller-than-expected amount of five- to 10-year Japanese government bonds during regular trading.

In a speech earlier in the week, Shinichi Uchida, deputy governor of the Bank of Japan, sent tough signals to investors, saying Japan was close to overcoming decades of deflation. “While we still have a major challenge in anchoring inflation expectations at 2 percent, the end of our battle is in sight,” he said, pointing to wage increases and structural changes in the country's labor market caused by the shortage. of workers.

But as investors raise bets that the Bank of Japan will tighten policy further, those expectations have done little to reverse the yen's stubborn weakness.

“It will be difficult for the Japanese side to push the yen higher unless investors think interest rates will start to rise seriously,” said UBS economist Masamichi Adachi. That would mean the Bank of Japan will need to raise its rates by more than one percentage point in 2024, a pace that Adachi considered unsustainable due to weak domestic demand as a result of the rising cost of living.

“The Bank of Japan is underestimating the weakness of the economy. It is a big dilemma,” he stated.

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