With the conclusion of the policy decision meetings of the central banks of Japan and the United States, the depreciation pressure of the yen is likely to increase this week. As US interest rates rose, with the spread between Japan and the US widening to its highest level in 10 months, money flowed easily into the dollar. With the exchange rate approaching the Y150 to the dollar mark, the market has become more wary of intervention to buy the yen.

Of the series of central bank meetings held through last week, the biggest surprise to the market was the meeting of the U.S. Federal Reserve Board (FRB). The reason is that the median forecast for the policy rate by the end of 2024 of participants at the Federal Open Market Committee meeting was 5.1 per cent, up 0.5 per cent from the last time. The view that US policy interest rates will remain high in the short term has widened, and market participants' "rate cut playbook" has gone wrong.

Goldman Sachs has revised the timing of interest rate cuts from April to June to October to December 2024. On September 22nd America's long-term interest rate rose to the crucial level of 4.5% for the first time in 16 years. Investors are gearing up for a prolonged period of high interest rates.

On the other hand, the Bank of Japan (the central bank) decided to maintain its current monetary easing policy. Bank of Japan Governor Kazuo Ueda denied the market's view that the negative interest rate policy should be ended as soon as possible, saying that the timing of the next revision is uncertain. As a result, the overnight index swap (OIS) market has postponed the lifting of the negative interest rate policy from January next year to March.

The difference in attitudes was reflected in the widening of the long-term interest rate spread between the two countries to 3.7 per cent, the highest level since November 2022. This put downward pressure on the yen, which traded at around Y148.4 to the dollar, the highest level of yen depreciation and dollar appreciation in 10 months.

Many say that Japan will have to reduce the rate of interest rate hike even if it moves away from negative interest rates due to its low potential growth rate. With the Federal Reserve indicating that it will maintain a higher policy rate beyond 2024, market participants realized that the yen was "vulnerable to selling." Yuji Goto, chief foreign exchange strategist at Nomura Securities, said: "There are also reasons for the strong momentum of the U.S. economy, and the depreciation of the yen and the appreciation of the dollar are easy to intensify in the short term."

If the yen depreciates further in the future, it will approach the 150 yen per dollar mark. Since the Japanese government and central bank intervened to buy 6.3 trillion yen in two business days from late October 2022, there has not been a situation of 150 yen per dollar.

The Japanese government has begun to intervene verbally. Masatsu Kanda, finance minister of the Japanese Ministry of Finance, said on September 20, We have been in close communication with relevant overseas departments, especially the United States, and have reached a consensus that we do not want excessive exchange rate movements.

Japanese Prime Minister Fumio Kishida also mentioned currency moves in a speech to U.S. investors on Sept. 21. In a strong tone, he put a check on yen selling: "We continue to pay close attention to excessive exchange rate movements and will take appropriate measures, including all options."

In view of this move, there is also a view in the market that the Japanese government will intervene in foreign exchange if the yen exchange rate falls to 150 yen per dollar or changes by more than 1% in a day, "(Takeshi Ishida, currency strategist at Risona Holdings).

According to the US Commodity Futures Trading Commission (CFTC), speculators are overselling the yen relative to the dollar by about Y1.27tn. Oversold volumes, once below ¥1 trillion, now tend to widen. If the government intervenes, this short yen position could be closed and the yen quickly appreciated.

Kishida will announce the core of his economic measures as early as September 25. Depending on the scale of the measures, it is likely to "create inflationary pressure in Japan" (Shunsuke Kobayashi, chief economist at Mizuho Securities). If inflation remains high enough to tempt the Bank of Japan to move away from negative interest rates, that would cause the yen to appreciate.

In the stock market, according to the FOMC outcome, the US interest rate remained high, causing alarm. The Dow Jones Industrial Average hit a 2 ½ -month low on September 22. Junhei Tanaka, a strategist at Pictet Japan, expects "a continued correction in the major U.S. tech stocks that have been pulling the world stock market."

Semiconductor-related stocks, which have a strong influence on the Nikkei stock average, are highly correlated with U.S. high-tech stocks. At a time when the U.S. stock market is sensitive to interest rate movements, Japan's moves to target higher prices are also limited.

On the other hand, the depreciation of the yen exchange rate is beneficial to the performance of Japanese export companies, and it is not easy to sell yen in large quantities. The index is likely to be even steadier.