The value of the yen has rebounded due to a joint intervention in the foreign exchange market by the United States and Japan, but the Wall Street Journal reported on August 3 that this recovery may not last unless the Bank of Japan accelerates its monetary tightening.
On August 4, the yen was trading around 157 yen per dollar in Asian markets, a significant drop from nearly 164 yen per dollar, which was the highest level in 40 years just before the US-Japan intervention. On August 3, the yen approached 155 yen per dollar.
However, investors are skeptical about the sustainability of the yen's recovery, given the widening interest rate gap between the US and Japan, as the Bank of Japan maintains a cautious stance on interest rate hikes. Currently, short-term interest rates in the US are about 2.5 percentage points higher than in Japan, and expectations of further rate increases by the Federal Reserve in September are adding pressure on the yen.
In contrast, the Bank of Japan is remaining cautious about raising interest rates, even as inflation exceeds its target. The central bank is wary of rapid monetary tightening after decades of battling deflation.
Nabil Millali, a portfolio manager at Edmond de Rothschild, stated, "Without tightening from the Bank of Japan, the yen's upward trend will not be sustainable."
Market analysts expect the Bank of Japan, which froze interest rates last week, to raise them in the coming months. However, the central bank's monthly purchase of approximately 2.5 trillion yen (about $22.57 billion) in government bonds to keep long-term interest rates low may limit the impact of any rate hikes on the yen.
Robin Brooks, a senior researcher at the Brookings Institution, pointed out, "On one hand, the Bank of Japan is buying bonds to lower long-term interest rates, while on the other hand, the Ministry of Finance is intervening in the market to support the yen, indicating a conflict in Japan's policies."
To support the yen in the long term, analysts suggest that Japanese investors need to repatriate their overseas funds. Goldman Sachs has assessed that bringing back the trillions of dollars invested abroad by Japanese investors could be the most powerful means to influence the exchange rate over time.
A significant rise in the yen could also send shockwaves through global financial markets, as many investors have engaged in "yen carry trades," borrowing yen at low interest rates to invest in high-yield assets like US tech stocks or the Mexican peso.
HSBC estimates the size of yen carry trades to exceed $1 trillion (approximately 1,424 trillion won). If the yen surges, investors may sell off their holdings and buy back borrowed yen, leading to increased volatility in both stock and foreign exchange markets.
Millali warned, "Many investors have positioned themselves expecting yen carry trades to continue, and a reversal in Japanese interest rates and yen trends could pose significant risks to them."
* This article has been translated by AI.
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