"I Thought Only Korea Was Struggling, but Japan Is Worse": Yen-Dollar Exchange Rate Hits 40-Year Low... What’s Happening to the Yen?

Daishin Securities: "Not a Short-Term Technical Move,
but a Result of Structural Conflict Between BOJ and MOF"

The yen-dollar exchange rate surpassed 163 yen on the morning of the 22nd, hitting its lowest level in 40 years since the mid-1980s and drawing attention to the future trajectory of the yen. Amid heightened wariness across the market over possible intervention by Japan's Ministry of Finance (MOF) in the foreign exchange market, Daishin Securities analyzed that the latest breakthrough in the exchange rate is not a one-off technical deviation, but rather the structural result of a clash between the Bank of Japan's (BOJ) monetary policy normalization and the MOF's efforts to defend the yen.

On the 23rd, Jae-Woon Cho, a researcher at Daishin Securities, stated, "The persistent strength of the dollar and expectations for BOJ normalization—two forces not yet fully reflected in the foreign exchange market—are surfacing most distinctly in the exchange rate level," explaining the current situation.

The backdrop to the yen's weakness lies in the expansion of the trade deficit. The trade balance for June, announced the same day, recorded a deficit of 406.9 billion yen—more than triple the market expectation of a 120 billion yen deficit. While exports increased by 19.3% year-on-year in nominal terms, the actual export volume rose by only 2.5%, indicating that much of the headline growth is attributable to currency conversion effects from the weak yen.

Recent factors also contributing to vulnerability in the current account include a rebound in international oil prices (with West Texas Intermediate (WTI) crude rising 5.7% over the past five days), which has driven up energy import costs again, and an 18.9% increase in the trade deficit with China.

The fact that the policies of the BOJ and the MOF are moving at differing speeds is another variable. On June 16, the BOJ raised its policy interest rate to 1.0% and formalized a stance of further hikes at several-month intervals, aiming to converge with a neutral rate of around 2%. Daishin Securities also conditionally reflects the possibility of an additional 25bp hike in September.

The problem is that this pace of rate hikes is still insufficient to support the exchange rate. The yield on two-year Japanese government bonds (JGBs) rose only 3bp over 20 days to reach 1.43%, while the 10-year yield climbed just 5bp to 2.72%. This suggests that the bond market has not fully priced in additional BOJ hikes. According to researcher Cho, even if the MOF intervenes, it is likely to serve as a means to slow the pace of yen depreciation rather than a catalyst to reverse its direction.

External factors supporting dollar strength are also unlikely to change in the short term. The Federal Reserve's rate futures market currently reflects a 70% probability of another hike in September and an 88% probability in December, indicating that the strong-dollar trend is expected to continue.

However, the Nikkei 225 Index rebounded by 3.26% from the previous day and has risen by 11.28% cumulatively over the past three months. Capital inflows have reached their highest levels in two years, and the dominance of artificial intelligence (AI) and technology stocks remains unshaken.

Researcher Cho commented, "Until the BOJ's monetary policy meeting (MPM) in September, key variables that will determine the pace of normalization and the intensity of policy conflict with the MOF will include confirmation of wage and service price trends, whether the Government Pension Investment Fund (GPIF) capital repatriation policy is implemented, and the actual impact of the Hormuz risk."

This content was produced with the assistance of AI translation services.