Yen rally depends on Bank of Japan rate decision
In Japan, the yen’s exchange rate, which rose by 5% against the dollar at the beginning of September, could change sharply after the Bank of Japan’s upcoming monetary policy decision. The market expects a more hawkish course and faster interest rate hikes from the regulator, but analysts point to a significant risk of disappointing investors, Channel NewsAsia reports, citing Reuters.
Last week, the yen strengthened to a nearly seven-month high of 152.89 yen per dollar. This came amid market bets that the Bank of Japan would accelerate the pace of rate hikes to once per quarter. The market is pricing in a rate above 2% in about a year, compared with 1% currently.
Market expectations and yields
Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo, believes that even a Bank of Japan rate hike may prove insufficiently hawkish for market expectations. He allows for the yen to weaken to around 157 per dollar and said that expectations of a terminal rate above 2% are too high for the Japanese economy.
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Pressure on the yen could also be intensified by the expected tightening of monetary policy by the US Federal Reserve. According to market estimates, the Fed will almost certainly raise its rate on Wednesday and may then do so once per quarter over the next 12 months. With both central banks tightening policy in parallel, the yield gap between 10-year US and Japanese government bonds could remain at around 200 basis points.
Bets on capital repatriation
An additional factor behind the yen’s strengthening was speculation that Japan’s Government Pension Investment Fund, with assets of about $2 trillion, could increase investments in domestic stocks and bonds. The fund released minutes of a meeting of its governing body, whose agenda included the basic investment portfolio. In July, Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama called on pension funds to invest more domestically.
At the same time, a GPIF representative did not comment on market speculation, saying only that the fund assesses its portfolio annually. Analysts consider expectations of large-scale capital repatriation exaggerated: GPIF management rules require minimizing the market impact of transactions, so any changes in asset allocation would take place over several months. In August, Japanese investors, on the contrary, directed 1.3 trillion yen, or $8.4 billion, into foreign stocks, the highest amount in five months.
