Yen rebounds from 32-year lows on hopes for slower Fed rate rises

Japan’s yen has powered back from 32-year lows on speculation the US central bank will slow its rate increases, stirring hopes among some analysts that a period of historic weakness is coming to an end.

In the past three weeks, the yen has risen from ¥151.94 against the dollar to about ¥139, with most of those moves taking place during US market hours as investors scrutinise signals from the Federal Reserve that it could slow the pace of future rate rises.

The yen’s sharp fall in recent months has caused alarm in Japan as rising bills of imported commodities and food caused the economy to contract in the July to September quarter, the first time in a year. The government recently announced a $200bn spending package to ease the impact on households of surging living costs.

But foreign exchange analysts and economists said that despite significant efforts by the Japanese authorities to support the yen, with around ¥9tn ($64bn) worth of intervention since September, the currency’s fate was dictated by the Fed and the dollar.

Takahide Kiuchi, executive economist at the Nomura Research Institute, said it would be premature to declare an end to the strong dollar trend until the Fed actually began a shift down from 0.75 percentage point rises, which the US central bank had implemented at every meeting since June.

A cooler than expected US inflation reading for October has helped stoke some optimism that the Fed will begin slowing down the pace of monetary policy tightening. Kiuchi, who was also a former Bank of Japan board member, said a turning point for the yen was close: “I think we are entering the final phase or chapter of the historic weakening of the yen. This is the start of an end to the weaker yen.”

This is the start of an end to the weaker yen

Yujiro Goto, chief foreign exchange strategist at Nomura Securities said that, despite what appeared to be a definitive recovery by the yen in recent days, investors remained nervous about calling an end to the selling.

Over the coming weeks, ahead of the Fed meeting in mid-December, it was possible that the yen could slide back towards the ¥145 against the dollar level, said Goto, though the likelihood that it would fall back below the ¥150 level was now diminished.

“In addition, I think that current account balance is recovering because of the reopening of the border and the return of tourists, and the oil price also seems to have peaked so it looks like the largest yen selling is likely behind us. If we have a pivot from the Fed that would invite some dollar selling globally,” said Goto.

Equity brokers said that clients had recently described a strong attraction to what were now exceptionally cheap-looking Japanese stocks, but had been holding back from buying as long as there was risk that the yen could collapse even further.

However, others are not ruling out another fall. Shusuke Yamada, foreign exchange and rates strategist at Bank of America, said that before calling a dollar peak, the market needed to see more evidence of cooling inflation in the US. 

“The labour market is still tight and wage increases are strong. For the dollar to peak against the yen and head lower will take more evidence,” he said, adding that while Japan remained in trade deficit, the corporate sector was still fundamentally producing selling pressure on the yen.