The Yen at a Crossroads

Coordinated intervention by Japan and the United States was carried out at the end of July, and the intervention amount is said to have reached a record ¥15.4 trillion, following a period of yen depreciation and dollar appreciation. Although the yen subsequently moved temporarily toward appreciation, long-term fundamentals have not completely eliminated the pressure for yen depreciation and dollar appreciation.

Market drivers changed in September, and the yen became active again. Expectations of Federal Reserve rate hikes and concerns over a widening Japan-U.S. interest rate differential increased downward pressure on the yen, while concerns over fiscal deterioration and developments in fiscal policy also had an impact. As a result, the yen reached the ¥152 range on 9 September in a period of yen appreciation.

Changes were also seen in speculative market positioning. The IMM non-commercial sector's net short position narrowed through early August and turned into a net long position in September. Including foreign exchange trading and movements in overseas capital, the yen's short-term movements have been influenced by both speculative positioning and fundamentals.

Over the long term, purchasing power parity factors and external asset factors may work to ease pressure for yen depreciation and dollar appreciation, while rising imported crude oil prices and uncertainty over fiscal policy may also sustain that pressure. A turning point for the yen could emerge depending on the course of the Japan-U.S. interest rate differential, but at present a clear direction remains difficult to discern.

Potential catalysts for a change in the yen depreciation and dollar appreciation trend include stabilization in the Middle East, fiscal reforms aimed at securing funding, and an acceleration in the Bank of Japan's pace of rate hikes. Although current economic fundamentals do not indicate any rapid change, the situation could change depending on developments from here.