The Weakest Yen in 40 Years... Why 170 Yen Is the Limit for the Dollar-Yen Rate [Weekend Money]
Japan Aims for Growth Through Debt
Yen-Carry Trade Is an Illusion
Fundamentals Will Defend the Upper Bound
As the Japanese yen continues to trade at its weakest level in 40 years, analysts suggest that the upper bound for the dollar-yen exchange rate will be defended at the 165 to 170 yen range, as long as the Bank of Japan (BOJ) maintains its current rate hike stance.
According to Kyobo Securities on July 12, the key factor driving the yen's direction recently is concern over fiscal expansion by the Takaichi administration. While the Japanese Cabinet's “Honebuto Policy” appears to be a growth strategy on the surface, a closer look reveals an intention to reduce debt through growth. As the framework for fiscal management changes, fiscal soundness indicators may appear favorable. However, the volume of government bonds that the market will need to absorb is expected to increase. This will lead to higher interest burdens, putting pressure on the BOJ to slow the pace of rate hikes and ultimately contributing to yen weakness.
On the other hand, aside from fiscal concerns, supply-demand dynamics and fundamentals act as factors that limit further yen depreciation. Overall fundamentals, including inflation, wages, and profit forecasts for Japanese companies, are still expected to induce a gradual strengthening of the yen.
Wi Jaehyun, Senior Researcher at Kyobo Securities, stated, “While yen-carry trades are often cited as the cause of yen depreciation, currently, carry returns themselves are actually declining. The phenomenon that looks like rising carry returns is an illusion caused by foreign exchange gains resulting from yen weakness.”
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He added, “While the policy environment is putting pressure on the BOJ’s rate hike pace and contributing to yen depreciation, in terms of supply-demand conditions, there is not much room for the yen to weaken further at the current exchange rate. As long as the rate hike stance is maintained, the yen will inevitably face upward pressure over time.”
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