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“Mrs. Watanabe” Strategy Fails The Yen is in Another Downward Spiral

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  • 2024-06-30
  • 22 comments

After a rapid rebound, the Japanese yen has once again fallen into a quagmire of depreciation. Since September 16th, when the US dollar to yen exchange rate hit a low of 139.582, it quickly rebounded, reaching a high of 153.188 to date, not far from the historical high of 161.956. This has reignited market concerns about whether the yen's depreciation will break through the previous low and when it will bottom out.

The rapid devaluation has also raised alarms among Japanese officials, who have stated they will closely monitor the exchange rate trends. On October 25th, Japan's head of foreign exchange affairs, Jun Mimura, said that they are highly alert to exchange rate fluctuations, including speculative ones. However, despite the yen's depreciation, the Japanese stock market has remained relatively stable. This Wednesday, Tokyo Metro, dubbed "Japan's largest IPO in six years," successfully went public and surged, adding strength to those bullish on the Japanese stock market.

The US dollar to yen exchange rate breaks through 151 again

This year, the yen has been in a general depreciation channel, with the US dollar to yen exchange rate once rising to 161.956. However, after peaking on July 4th, the US dollar to yen began a rapid decline, falling to a low of 139.582, and then this trend reversed, with the yen weakening again. Currently, the US dollar to yen has risen to the 151 level, touching a high of 153.18, the highest level since the end of July. The recent sharp rise has pushed the US dollar to yen above the 200-day moving average of 151.38, with some industry insiders saying this opens the door for further yen depreciation.

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The rapid devaluation of the yen has also attracted official attention. On October 23rd, Japanese Finance Minister Katsunobu Kato warned against currency speculation, expressing concern about the "one-sided, rapid" trend in the currency market that is driving the yen's depreciation. Kato stated, "Maintaining exchange rate stability is very important. We are closely monitoring exchange rate trends, including any speculative activities."

Nomura International analysts pointed out that if the yen further weakens after the Japanese House of Representatives election, this will not only increase the possibility of government intervention but may also prompt the Bank of Japan to hint at a possible interest rate hike as early as December at their policy meeting on October 31st. Nomura currency strategist Yusuke Miyairi said that the yen seems to be playing the role of a pressure relief valve, alleviating all pressures faced by Japan's macroeconomy.

Japan's last intervention to buy yen was at the end of July to support the yen, when the US dollar to yen exceeded 161, setting a 38-year high and causing a panic in the market. Although a weak yen has boosted exports, the rise in import raw material costs has hurt households and retailers, becoming a concern for policymakers.

The recent depreciation of the yen has mainly been passive. Over the past three weeks, as Federal Reserve officials have continuously signaled cautious signals about gradual interest rate cuts, the US dollar index has followed the continuous rise in US Treasury yields. Currently, the US dollar index is maintained above 104 points, and at the end of September this year, due to the Federal Reserve's unexpected interest rate cut, the US dollar index once tested the support at 100 points. In addition, the Bank of Japan's ultra-loose monetary policy, coupled with Bank of Japan Governor Haruhiko Kuroda's hint that he is not in a hurry to raise interest rates, has also been interpreted by the market as a cause of yen weakness.

Monex foreign exchange trader Helen Given said, "The yen is once again on a dangerous path, especially considering the very low possibility of the Bank of Japan raising interest rates at next week's meeting. Before the end of this year, it is very likely that the US dollar to yen will head towards the 155 level."As of October, the Japanese yen has depreciated by about 6% against the US dollar, potentially marking the worst performance since April 2022. Although all G10 currencies have weakened against the US dollar this month, the yen's decline is notably "far ahead."

In terms of interest rate differentials, on Wednesday, Japanese government bonds and US Treasuries fell in price together, with the yield on 40-year Japanese government bonds briefly rising to 2.535%, the highest since 2008. However, the recent increase in Japanese government bond yields is clearly not as rapid as that of US Treasuries.

Marito Ueda, head of market research at SBI Liquidity Market Co., stated that US Treasury yields are unlikely to decline, and the US dollar is also unlikely to be sold off, which would provide strong support for the dollar.

Foreign capital floods into the Japanese stock market

The yen has plummeted, but the Japanese stock market has performed relatively strongly. The Nikkei 225 Index once broke through 42,000 points this year, setting a new high in 34 years. Funds linked to the Japanese stock market have seen significant premiums, and despite repeated risk warnings from fund companies, market enthusiasm remains undeterred.

However, in August of this year, the situation reversed. The Nikkei Index suddenly turned, and on August 5, it plummeted by 12.4%, leading the global decline. But just as the market was worried about when the bottom of the Japanese market would be, the stock market rebounded quickly, with the Nikkei 225 Index rebounding quickly from a low of 31,156 points to 40,257 points. Although the market has fluctuated recently, the Nikkei 225 Index has remained around 38,000 points. As of the close on October 25, the Nikkei 225 Index reported 37,913.92 points, with a year-to-date increase of 13.3%, still performing strongly among global major markets.

One of Europe's largest private banks, Lombard Odier, is turning bullish on the Japanese stock market, believing that it is an optimal investment point. The company's Chief Investment Officer for Asia, John Woods, said on Wednesday: "I think Japan is now in a win-win situation." He added that Lombard Odier upgraded its rating on the Japanese stock market from neutral to overweight last week.

The overall positive stock market has also given IPOs confidence. Tokyo Metro, dubbed "Japan's largest IPO in six years," caused a sensation in the Japanese stock market on its debut. On October 23, Tokyo Metro's share price soared by 47% at one point, opening at 1,630 yen and reaching a high of 1,768 yen, far above the IPO price of 1,200 yen, with a market value once exceeding 10 trillion yen. On October 23, Tokyo Metro closed at 1,739 yen, up 42% from the issue price. This outstanding "achievement" is even more eye-catching than the average increase of 34% in the share prices of Japanese companies listed this year, adding more bullish strength to the Japanese stock market. On October 25, Tokyo Metro fell by 5.46%, closing at 1,609 yen.

Senior market strategist at AllianceBernstein, Huang Senwei, also said that the Japanese stock market has been a relatively favored market for foreign capital in recent years because the depreciation of the yen has boosted the performance of Japanese export companies. In recent years, Japanese listed companies have also been committed to corporate governance reforms and improving shareholder returns, and Japan is gradually moving out of deflation.Statistics released by Japan's Ministry of Finance show that as of October 19th, foreign capital has cumulatively purchased 2.11 trillion yen worth of Japanese stocks this year.

The Bank of Japan stated in its latest financial system report that the activity level of the Japanese stock market has been higher than the historical trend level this year, but there has been no significant overheating in stock valuations. The Bank of Japan noted that the price-to-earnings ratio has remained at the historical average level. The Bank of Japan added: "Considering the market risks associated with Japanese banks holding stocks to a certain extent, the development of asset prices is worth paying attention to."

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