The Japanese yen exchange rate suddenly plummeted.
The strong US dollar is making a comeback, while the Japanese yen has suffered a heavy blow. Since the beginning of this week, the US dollar index has continued to strengthen, with a weekly increase of 1.6%, marking the largest weekly increase since September 2022. Among them, the Japanese yen was hit the hardest, with the yen falling 4.4% against the US dollar this week, marking the largest weekly decline since 2009.
The internal reason for the sharp decline in the Japanese yen exchange rate is the significant transformation of Japan's newly appointed Prime Minister Shigeru Ishiba. He stated this week that the Japanese economy is not yet ready for further interest rate hikes. This is clearly contrary to his previous stance of supporting the Bank of Japan to end its monetary stimulus policy. On October 6th, former finance official of the Ministry of Finance in Japan, Eiji Sakamoto, stated that the depreciation trend of the Japanese yen may continue in the short term.
The external pressure for the significant depreciation of the Japanese yen mainly comes from the strong counterattack of the US dollar. The US dollar index has risen for five consecutive days and has now reached its highest level since August 16th. Affected by the September employment data in the United States, the expectation of the Federal Reserve cutting interest rates has significantly cooled down, and traders have significantly reduced their short bets on the US dollar. Analysts believe that the latest employment data significantly enhances the strong momentum of the US dollar, and the rise of the US dollar may continue further.
The Japanese yen plummeted sharply
The strong US dollar is making a comeback, while the Japanese yen has suffered a heavy blow.
Since the beginning of this week, the Bloomberg US Dollar Spot Index has continued to strengthen, with a weekly increase of 1.6%, marking the largest weekly increase since September 2022. Among them, the Japanese yen was hit the hardest, with a cumulative drop of 4.4% against the US dollar this week, the largest weekly decline since 2009, and now at 148.73, the lowest level in a month and a half.
On the news front, Japan's newly appointed Prime Minister Shigeru Ishiba stated this week that the Japanese economy is not yet prepared for further interest rate hikes. Following Shigeru Ishiba's speech, Bank of Japan Governor Kazuo Ueda also expressed a similar cautious view. As a result, the Japanese yen against the US dollar fell sharply by more than 2% on that day, marking the largest single day decline since June 2022 and far exceeding the volatility during the volatile market period in early August.
Shigeru Ishiba attempted to make it clear to the outside world that he did not pressure the Bank of Japan on its interest rate policy. He expressed agreement with Kazuo Ueda's viewpoint that there is still time to assess market and economic conditions before adjusting interest rates.
Shigeru Ishiba made the above comments to reporters later on Thursday, indicating another shift in his tone on monetary policy.
Analysts point out that the new prime minister is pondering the best way to communicate with the market and trying to avoid being seen as hindering the policy independence of the Bank of Japan. Shigeru Ishiba stated after his meeting with Kazuo Ueda that the Japanese economy is not yet prepared for further interest rate hikes. This unusual outspokenness by the Japanese Prime Minister triggered a sharp drop in the yen.
Before being elected as the President of the Liberal Democratic Party, Shigeru Ishiba expressed support for the Bank of Japan's monetary policy normalization process to support the weak yen, which led market participants to believe that he would support the central bank's continued interest rate hikes after taking office.
But after Shigeru Ishiba suddenly changed his mind, the futures market hinted that the possibility of the Bank of Japan raising interest rates by 10 basis points before the end of the year is less than 50%.
But market analysts' long-term policy expectations for the Bank of Japan have not changed. Among them, Ken Matsumoto, macro strategist at the French Agricultural Credit Bank, believes that as the Japanese economy and inflation outlook return to normal, the market expects the Bank of Japan to raise policy rates again at its upcoming October meeting. He added that he expects the Bank of Japan to raise interest rates at its meeting in January next year.
For the Japanese economy, although the depreciation of the yen may enhance export competitiveness in the short term, the rising import costs and increased domestic consumption pressure are hidden dangers that cannot be ignored.
On October 6th, according to the Nikkei Chinese website, former finance official of the Ministry of Finance in Japan, Eiji Sakamoto, said: "The trend of yen depreciation may continue in the short term. But I have always felt that the US economy may weaken slightly in the future, and the Japanese economy (relatively speaking) may be quite strong. It is not surprising that the yen will appreciate to around 130 yen to 1 US dollar by 2025. Sakamoto Eiji is known as the "Mr. Yen" for his leadership in the currency market during his tenure at the Japanese Ministry of Finance from 1997 to 1999. He currently serves as the director of the Japan Economic Research Institute.
The counterattack of the US dollar
The external pressure for the significant depreciation of the Japanese yen mainly comes from the strong counterattack of the US dollar.
On October 4th Eastern Time, the US dollar index rose 0.52% to 102.52, marking the fifth consecutive day of gains and reaching its highest level since August 16th.
The main reason for the sudden surge in the US dollar is that, influenced by the September employment data, the expectation of a Fed interest rate cut has significantly cooled down, and traders have significantly reduced their short bets on the US dollar.
According to the latest data, the number of non farm payrolls in the United States surged by 254000 in September, the largest increase since March 2024, far exceeding market expectations of 150000. In addition, the unemployment rate dropped to 4.1%, a decrease of 0.1 percentage points, the lowest since June 2024.
Analyst Audrey said that the latest employment data once again reminds investors that the market underestimates the US economy. This is a convincing and strong report that can temporarily put aside recent discussions about recession, which significantly enhances the strong momentum of the US dollar. Analyst Nour also believes that the upward trend of the US dollar will continue after the shocking employment data is released in the United States.
A Federal Reserve tracking data from the Chicago Mercantile Exchange Group shows that after the release of the September employment report, the market expects the possibility of the Fed cutting interest rates by 25 basis points in November to exceed 90%, while the possibility of a 50 basis point rate cut drops to zero.
Bank of America, JPMorgan Chase, BlackRock and other institutions collectively changed their expectations for interest rate cuts, all believing that the Fed's rate cut at the November meeting may not be the previously widely expected 50 basis points, but 25 basis points.
It is worth noting that even 'the Federal Reserve will not cut interest rates this year' has entered the realm of discussion on Wall Street.
Among them, Wall Street veteran Ed Yardeni said that the Federal Reserve's monetary easing policy this year may have ended, as Friday's strong non farm payroll report highlighted the economy's resilience. The aggressive pricing of interest rate cuts in the market has accumulated risks, so the Federal Reserve should be more cautious in this decision.
Former Federal Reserve Governor Randy Kroszner also believes that if US employment data continues to exceed expectations, the Fed may decide not to cut interest rates at all.