The yen fell back to the ¥160 range per dollar, sending stock markets in Japan, South Korea and Taiwan broadly lower. Against the backdrop of the Fed’s hawkish stance, expectations for US rate hikes were revised upward, and the renewed breach of the ¥160 threshold raised funding-cost pressures across Asia.
The yen temporarily weakened to ¥160.19 in Asian trading on 31 August, while the spillover from yen depreciation pushed the Nikkei 225, South Korean stocks and the MSCI Asia-Pacific Index lower. Taiwanese stocks also fell sharply in morning trading, with semiconductor shares including TSMC generally remaining weak.
Remarks by Fed Chair Kevin Warsh were cited as the main market driver, raising the probability of an additional rate hike in September. The US 2-year Treasury yield remained elevated at 4.33%, while the dollar index moved around 99.6. Yen depreciation has become an indicator of rising funding costs globally.
In Japan, the yen continued to weaken, while the risk of an acceleration in Bank of Japan rate hikes and increasing government pressure for intervention were identified as potential developments. Markets are focused on the impact of policy responses if the yen appreciates sharply or remains weak.
As the stronger dollar prompts a broad reassessment of risk-asset valuations, the focus now is on how extensively higher funding costs resulting from efforts to guide the yen higher will spread through markets. Policy developments at the Bank of Japan and the government could affect spillovers into global equity markets.