This report reviews the course of yen depreciation in 1998, when coordinated intervention failed to produce the desired effect before the LTCM shock and Federal Reserve rate cuts turned the trend toward yen appreciation. It also discusses how a sharp fall in the SOX Index deepened market anxiety and its connection with the “self-destructing US dollar.”
The yen's depreciation around June 1998 and coordinated intervention by Japan and the US initially failed to produce a sufficient effect. The yen's depreciation continued, with new levels reached, and there were periods when the exchange rate fell below its pre-intervention level. It appeared that the means of stopping the yen's decline had been exhausted.
The situation then changed completely as the large unrealised-loss problem at hedge funds known as the Long-Term Capital Management (LTCM) shock came to light. As the Federal Reserve cut interest rates for three consecutive months from September, the effect of coordinated Japanese-US intervention remained limited and the trend turned toward yen appreciation.
The yen weakened to the ¥147 range in August, but appreciated sharply in September, briefly moving below ¥130. The bearish yen sentiment remained entrenched thereafter, but as losses were processed, selling of US dollars and buying of yen occurred in succession, with the exchange rate at one point moving sharply from ¥134 to ¥111 in three trading days.
The recent sharp fall in the SOX Index and other developments in AI-related markets have become sources of concern, and the possibility that the Federal Reserve's next move will be a rate cut is being discussed. Against this backdrop, the scenario of a self-destructing US dollar is again being cited as a turning point for the yen.