Yen resumes decline on doubts over Japan interest rate rises

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The Japanese yen has fallen sharply in recent weeks, hitting levels not seen since before a sudden surge in the summer that reverberated across global markets.

The yen last week sank below ¥150 to the US dollar, and has lost about 5 per cent over the past month as investors bet on a slower pace of interest rate rises from the Bank of Japan, at a time when the US Federal Reserve is also expected to cut rates more slowly than previously thought. Dovish comments from Japan’s new prime minister, who had previously been critical of the BoJ’s very loose monetary policy, have helped the currency resume a slide that carried it to 34-year lows earlier in the year.

The shift, investors said, has rekindled interest in the so-called yen carry trade, where investors borrow in yen to fund bets in higher-yielding currencies, a bet that blew up spectacularly in August after the BoJ raised borrowing costs.

Hiroki Hashimoto, a senior fund manager at Royal London Asset Management, said the recent weakness could “likely be explained by the recent widening interest rate differentials between the US and Japan”. He said the risk that the governing party loses its lower-house majority at a snap election this month “could have led to the less hawkish comments” from new Prime Minister Shigeru Ishiba. 

This month, Ishiba said that the economy was “not in an environment” for further interest rate rises by the BoJ.

The central bank raised interest rates this year for the first time since 2007. Its benchmark rate now stands at 0.25 per cent, and traders in swaps markets are putting a low probability on a further increase at the BoJ’s two remaining meetings this year.

Recent declines in inflation have already raised questions over how much further Japanese borrowing costs are likely to rise, according to Tomasz Wieladek, chief European economist at asset manager T Rowe Price. “It will become increasingly difficult for the BoJ to keep hiking without risking undershooting the [2 per cent] inflation target,” he said.

Strong economic data in the US have also piled pressure on the yen by boosting the dollar.

Mark Dowding, chief investment officer at RBC BlueBay Asset Management for fixed income, said the “big move in yen has really come from a big move in US rate expectations”, coupled with investors pushing back the timing of expected rate cuts by the Bank of Japan. Yen carry trades had been making a “small comeback”, he added.

The currency’s renewed decline last week prompted Japan’s top currency official to warn that he was monitoring “speculative moves” in the market “with a high sense of urgency”. Japan spent a record ¥9.8tn ($65bn) from late April to May to boost the yen.

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