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Challenges Ahead for the Japanese Yen
Deutsche Bank AG’s Global Head of Foreign Exchange Research, George Saravelos, has cast doubt on the effectiveness of the Bank of Japan’s efforts to defend the yen. He draws a striking comparison between the yen and the two worst-performing currencies in emerging markets over the past decade, namely the Turkish lira and Argentinian peso.
The Yen’s Vulnerability
Saravelos highlights that when examining the key drivers of the yen’s value, such as yields and external accounts, it becomes apparent that the Japanese yen shares similarities with the Turkish lira and Argentinian peso. Both of these emerging market currencies have experienced significant depreciation, with declines exceeding 90% against the US dollar over the past 10 years.
Traditionally Regarded as a Safe Haven
This comparison is noteworthy given the yen’s historic reputation as a safe haven currency and a preferred choice for international investors. The yen ranks as the third-most traded currency globally, and Japan stands as the world’s fourth-largest economy.
Recent Yen Decline
The yen recently saw its most substantial one-day drop since April, following a modification to the Bank of Japan’s (BOJ) cap on bond yields. The adjustment underwhelmed investors who were anticipating a shift towards policy tightening and suggested a gradual move away from the ultra-loose monetary stance. In response to these developments, Masato Kanda, Japan’s top currency official at the finance ministry, mentioned authorities’ readiness to take action if necessary.
Predictions for Yen Intervention
Saravelos argues that any intervention in the currency market by Japanese officials might end up strengthening the US dollar. He anticipates that capital outflows from Japan will accelerate, particularly as local yields, adjusted for inflation, delve deeper into negative territory.
A Reversal Requires Rate Hikes
Saravelos believes that the broad underperformance of the yen in the past two years can only be reversed when a significant change occurs: the Bank of Japan initiates rate hikes, and these adjustments are more substantial than minor shifts towards zero.
In conclusion, the Japanese yen faces challenges reminiscent of emerging market currencies that have experienced significant depreciation. Saravelos’ comparison underscores concerns about the yen’s trajectory and its ability to regain its traditional status as a safe haven currency. The effectiveness of the Bank of Japan’s intervention in addressing these issues remains uncertain.
