“Planning a Trip to Japan?”… Accelerating Yen Strength [Weekend Money]

USD/JPY Could Drop to 150 Yen Level
Narrowing Rate Gap and Large-Scale Interventions
Limited Impact from Yen Carry Trade Unwinding

Recently, the USD/JPY exchange rate has been falling sharply, making the Japanese yen one of the strongest rising major currencies. With growing expectations of monetary policy divergence between the U.S. and Japan and the effects of foreign exchange authorities’ intervention beginning to materialize, analysts suggest the USD/JPY rate could drop further to around 150 yen in the short term.

An employee is holding a Japanese yen banknote at the Counterfeit Currency Response Center of Hana Bank in Jung-gu, Seoul. Photo by Yonhap News Agency

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According to iM Securities on September 13, the USD/JPY exchange rate plunged 3.4% compared to the end of last month, dipping into the 154-yen range. The acceleration of yen appreciation is primarily driven by U.S. pressure for a stronger yen and heightened expectations for differing monetary policy trajectories between the two countries’ central banks.

While the likelihood that the U.S. Federal Reserve (Fed) will keep interest rates on hold in September has increased, additional rate hikes are widely expected at the Bank of Japan (BOJ) monetary policy meeting scheduled for September 18. The market anticipates the BOJ could raise rates again in the fourth quarter, following a move in September. Reflecting this sentiment, the yield spread between U.S. and Japanese two-year government bonds has continued to narrow.

The Japanese foreign exchange authorities’ large-scale intervention is also finally proving effective. The Japanese Ministry of Finance conducted yen-buying interventions totaling 11.7 trillion yen in April and May, followed by 15.3993 trillion yen at the end of July to early August. With the recent support from the U.S. Treasury Department joining these interventions, the efforts to defend the yen are beginning to show clear results.

iM Securities assessed that further declines in the USD/JPY rate remain possible, given a series of upcoming key monetary policy meetings from major countries. In particular, if yen strength intensifies, speculative short positions that had been betting on yen weakness may be rapidly unwound, thereby amplifying the currency’s upward movement. According to the U.S. Commodity Futures Trading Commission (CFTC), as of early September, global hedge funds’ net short positions on the yen against the U.S. dollar reached approximately 1.2 trillion yen, up 33% from the previous week.

Regarding concerns from some market participants about the risk of “yen carry trade unwinding” due to the yen’s appreciation, iM Securities cautioned against excessive anxiety. In order for a major global equity sell-off triggered by massive yen carry trade unwinding, as seen in the past, the USD/JPY rate would need to plummet alongside a sharp deterioration of U.S. economic and real sector indicators. However, it is currently evaluated that the U.S. economy and stock market remain relatively stable.

Park Sanghyun, a researcher at iM Securities, stated, “In the short term, there is room for the USD/JPY rate to fall to the 150-yen level,” adding, “Given the increasing synchronization trend between the won and the yen, a further drop in the USD/JPY rate could also put downward pressure on the USD/KRW rate, causing it to fall below expectations.”

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