The Japanese yen exchange rate continues to hit a new 38-year low. When will the next intervention by the Bank of Japan come?

Since last Wednesday, the yen-dollar exchange rate has continued to hover at a 38-year low. On the evening of July 3, the yen fell to 161.96 yen to the dollar, setting a new low since December 1986.

Since 2024, the yen-dollar exchange rate has accelerated its decline. Since the beginning of the year, the yen has depreciated by nearly 13% against the dollar, exceeding the decline of about 7% in the whole of last year. The main reason for the accelerated depreciation of the yen is that the Fed's expectations of interest rate cuts have been repeatedly postponed, resulting in a historically high interest rate gap between the United States and Japan.

In response to the situation of the yen's out-of-control exchange rate, the Japanese government has taken a series of foreign exchange intervention measures, including verbal warnings and direct market intervention. According to data from the Ministry of Finance of Japan, from April 26 to May 29, the scale of the Japanese government's foreign exchange intervention reached a record 9.8 trillion yen (about 62 billion US dollars). However, without the "cooperation" of the Fed's interest rate cut, these intervention measures failed to effectively curb the trend of yen depreciation.

In addition, analysts pointed out that the Japanese government's ambiguous attitude towards the depreciation of the yen, and the lack of coordination of macro policies such as monetary policy in foreign exchange intervention, are also one of the reasons for the failure of this round of intervention.

The Global Economic and Financial Research Group of the Bank of China Research Institute pointed out that for decades, in order to boost export competitiveness and economic growth, the Japanese government has been happy to see the depreciation of the yen exchange rate, and "Abenomics" also uses the depreciation of the yen as one of its policy tools. For this round of yen depreciation, the Japanese government allowed the yen exchange rate to break through the key points of 152 and 155 in succession, causing speculative arbitrage transactions to expand and depreciation pressure to accumulate. Although the Bank of Japan ended its negative interest rate policy in March this year, the pace of monetary policy tightening was slower than expected. At the interest rate meeting in June, it postponed the announcement of the reduction of the bond purchase plan, and the expectation of monetary policy normalization was repeatedly frustrated, causing the yen exchange rate to fall further.

James Stanley, senior strategist at the US foreign exchange trading platform Forex, said that judging from the statements of the Japanese monetary authorities so far, they are not really ready for the next intervention.

He pointed out that Japanese Finance Minister Suzuki Shunichi said on Tuesday that he was closely watching the yen exchange rate and said that the government's position on foreign exchange policy had not changed. Suzuki is one of the Japanese officials who have issued similar warnings or statements in recent days.

"Traditionally, if the Ministry of Finance wants to intervene, they usually don't issue warnings. The current situation is frequent verbal warnings, which just shows that they are not ready to intervene, which will only lead to further weakening of the yen. 165 may be the key point that prompts them to take action." Stanley said at a seminar on Tuesday.

He further pointed out that compared with the extent of depreciation, the Japanese monetary authorities may be more concerned about the speed of depreciation and do not want to see a large influx of speculators causing the exchange rate to fall sharply in a short period of time.

In addition, analysts pointed out that Japan's Deputy Finance Minister Kanda Masato is about to leave, which to a certain extent reduces the possibility of the Japanese government intervening in the foreign exchange market again in the short term. Last Friday, the Japanese government announced that Kanda Masato will leave at the end of July and his successor will be Atsushi Mimura, director of the International Bureau of the Ministry of Finance.

Kanda is the highest official in charge of foreign exchange affairs in Japan. He has a relatively positive attitude towards intervening in the foreign exchange market. The Japanese government's yen purchase actions in the fourth quarter of 2022 and from late April to early May this year were all carried out under his leadership.

Matt Weller, head of global research at Forex, pointed out in an article that Kanda's term is about to end, and it is unlikely that he will lead the intervention in the foreign exchange market again, thereby reducing the possibility of the Japanese government intervening in the foreign exchange market in July. He predicts that the yen-dollar exchange rate will continue to hover around 160 in the short term, and the possibility of falling to 165 or even 170 in the next few weeks cannot be ruled out.

However, the Bank of China research team believes that in the second half of this year, as the Federal Reserve starts to cut interest rates, the US-Japan interest rate gap will narrow slightly, the yen exchange rate will be supported, and the pressure on the yen to depreciate will be slightly relieved. The research team also believes that the Bank of Japan may raise interest rates again in July, and the main driving force behind its interest rate hike is "reflation." On the one hand, as the yen continues to depreciate, the risk of imported inflation has intensified. Japanese companies that are highly dependent on overseas energy and raw materials have been affected by the depreciation of the yen, and their production costs have been further pushed up, leading to continued increases in domestic food and daily necessities prices; on the other hand, the labor market continues to be tight, and a virtuous cycle of "wage-inflation" is expected to form.

Data released by the Bureau of Economic Analysis of the U.S. Department of Commerce last Friday showed that in May, the core personal consumption expenditure price index (PCE) excluding energy and food prices rose 2.6% year-on-year, 0.2 percentage points narrower than the previous month, the lowest level since April 2021, which has rekindled the market's expectations for the Fed to cut interest rates in September.

On July 2, Federal Reserve Chairman Jerome Powell said at an industry conference in Portugal that the U.S. economy has made significant progress in fighting inflation and inflation has returned to a downward path again. Market analysts believe that Powell's speech is "dovish" and the Fed is more likely to cut interest rates later this year.