Yen Unmoved by FX Intervention, Nikkei Stagnant?
The current trading price of the Japanese yen is still some distance away from the psychological threshold for intervention by Japanese authorities, as the fluctuation range of the yen against the US dollar has not yet reached the intervention threshold set by the Japanese government, which is a rapid change of 10 yen. Specifically, an indicator measuring the fluctuation of the US dollar against the yen from the lowest point in the past 28 days to the high point on Monday shows that the fluctuation range is 6.32 yen, which is about 3.7 yen lower than the "rapid" fluctuation range of 10 yen previously described by Kanda Masato. This means that despite the increased volatility of the yen, it has not yet reached the level that requires urgent intervention.
Investors also seem to be unmoved by the warnings of intervention from Japanese authorities. In the currency options market, the insurance premiums (option costs) used to hedge against the appreciation of the yen against the US dollar have been decreasing for five consecutive days compared to the insurance premiums for hedging against the depreciation of the yen. This indicates that traders are betting that the yen will continue to depreciate.
As of 19:30 Beijing time on the 25th, when the reporter stopped writing, the US dollar against the yen was still reported at 159.44. After Kanda Masato's speech, it briefly fell during the European trading session on Monday, but then resumed its upward trend, only a step away from the 34-year low.
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It is also worth noting that, slightly different from the statements before the actual intervention by Japanese authorities earlier this year, Japanese officials seem to be more cautious about intervention in recent weeks. For example, at the beginning of June, Japanese Finance Minister Shunichi Suzuki said that officials would continue to pay attention to exchange rate trends, but intervention should be limited.
Shinichiro Kadota, a foreign exchange strategist at Barclays Securities Japan in Tokyo, told First Financial Journalists that the US dollar against the yen will still maintain an upward trend in the short term, because no matter what the expectations are for interest rate hikes by the Bank of Japan and interest rate cuts by the Federal Reserve this year, the interest rate difference between the US and Japan is still too large to prevent the yen selling caused by related arbitrage transactions. It is not until 2025, as the Bank of Japan and the Federal Reserve extend their interest rate hike and cut cycles, that the yen can finally get rid of the continuous downward pressure brought by arbitrage. Helen Given, a foreign exchange trader at Monex, also said: "I am increasingly convinced that Japanese monetary officials are giving up on the yen. The gap between US and Japanese yields is now too large, and now the Federal Reserve implies that there will only be one interest rate cut this year, so the US-Japan interest rate difference will not have a substantial improvement in the short term."
In addition, Kadota also added: "Some changes in capital flow dynamics, such as the new small investment non-taxation system (NISA) tax-free, allow more Japanese retail investors to invest abroad, which is basically enough to offset more than half of the impact of the current account surplus and structural deficit on the yen (Japan against the United States), and also covers up any positive impact that the prosperity of Japan's inbound tourism brings to the yen." However, he also frankly stated that the intervention of Japanese authorities in the foreign exchange market is still the biggest concern for traders who are long on the US dollar against the yen. Considering all the above factors, he expects that the exchange rate of the US dollar against the yen will continue to trade around 160 by the end of this year.
Can't even rise for several days?
The market seems to be used to the weak yen and the frequent verbal intervention warnings from Japanese foreign exchange officials, just as the market has become accustomed to the continuous new highs of Japanese stocks. However, this pattern has been broken recently.
Data from the Tokyo Stock Exchange shows that in the week ending June 14, overseas investors net sold 250 billion yen ($1.6 billion) worth of Japanese stocks, recording the longest consecutive net selling record since September last year. Affected by this, the Nikkei 225 Index has not only been in a long-term stagnant state since it set a historical high on March 22, but also fell 5.6% after a long period of consolidation, while the MSCI Asia-Pacific Index rose 1% during the same period, and the US S&P 500 Index rose 4.4%. The trading volume of the Tokyo Stock Exchange has also recently dropped to the lowest level of the year.
Hebe Chen, an analyst at IG Markets Ltd., said bluntly: "The optimism of overseas investors for the Japanese stock market earlier this year obviously encountered a speed bump. Investors are facing a self-reflection question, that is, whether the driving force of the Japanese stock market is sustainable."A survey conducted by Bank of America on fund managers revealed that about one-third of the respondents believe that the Japanese stock market has already peaked. Institutions such as Citigroup and Aberdeen Asset Management (abrdn Plc) see a potentially more pessimistic outlook for the Japanese stock market due to the uncertain prospects of corporate governance reforms and the Bank of Japan's monetary policy.
Citigroup analyst Ryota Sakagami stated that the Japanese stock market is facing a "significant adjustment risk," and some situations that were previously interpreted by the market as positive factors may take some time to materialize. Aberdeen Asset Management analyst David Zhou indicated that over the next 3 to 6 months, compared to Japanese stocks, Aberdeen prefers Chinese and Indian stocks, as more funds are expected to flow towards China and India due to policy support. For Japanese stocks, overseas investors may need to see more progress in corporate governance reforms before they can continue to invest heavily.
At the same time, investors are also concerned about the fundamentals of Japanese stocks, namely the Japanese economy, which is also dragging down the Japanese stock market.
This concern goes back to the long-term weakness of the yen. For many years, a weak yen was considered beneficial to Japanese exports and the economy, but as the yen continues to weaken, investors are increasingly focusing on the negative impacts of a weak yen, namely increasing the pressure of imported inflation in Japan and harming the Japanese economy. Aisa Ogoshi from J.P. Morgan Asset Management said, "We would like to see at least some bottoming in the trend of yen weakness," which could be more beneficial to the Japanese domestic economy.
Takashi Takahashi, a strategic analyst at J.P. Morgan Securities, emphasized: "From the global stock trend, since June, the market has begun to realize the risk of a slowdown in the U.S. economic growth. As a result, for Japanese stocks, funds have also shifted from economically sensitive stocks to high-quality stocks. However, the number of high-quality stocks in Japan is limited. Therefore, this change in capital preference indicates that the Japanese stock market may remain in a long-term sideways trend."