This week (October 30 to November 3), the Japanese financial market is expected to be volatile. In addition to the central banks of Japan and the United States meeting to determine monetary policy, whether the Japanese government and the Bank of Japan (BOJ) carried out exchange rate intervention in October will be disclosed. Without intervention, the yen is likely to weaken further. The situation in the Middle East is rapidly becoming tense, and the variables affecting the yen’s exchange rate are increasing. There is also a growing sense of caution in the stock market.
The yen-dollar exchange rate fell to 150.70-150.79 yen per dollar on October 26, the second half of last week, hitting a one-year low. The exchange rate, which was largely unchanged in the 149.0-149.9 yen range, is returning to volatility. Many believe volatility will increase this week. The reason is that the factors causing market volatility will continue to emerge.
One of the main factors driving the yen’s appreciation has been rising tensions in the Middle East. The yen is likely to be bought as a “low-risk asset.” Israel is intensifying its ground operation in Gaza, the Palestinian autonomous region. If the local battle with the Islamist group Hamas evolves into a situation that involves other Middle Eastern countries, the yen is likely to rise.
At the same time, the forces driving down the yen are also clear. The Bank of Japan will hold a monetary policy meeting on Oct. 30-31 and announce the results of the meeting on Oct. 31. There are some views that predict the modification of the long-term and short-term interest rate operations (yield curve control, YCC). If the YCC is revised three months after July, when the long-term interest rate ceiling was raised by 0.5 percent, the market will realize the normalization of monetary policy.
Until now, the depreciation of the yen has been exacerbated by the widening of the Japan-US interest rate gap. Even if the Bank of Japan revises the YCC, the interest rate spread will not narrow significantly, and the depreciation pressure on the yen will remain. But in the absence of a correction, investors who bought the yen are likely to sell it instead.
In addition, the Japanese Ministry of Finance will publish its report on currency intervention from September 28 to October 27 on September 31, the same day as the Bank of Japan meeting.
The yen hit the Y150 mark on October 3 before briefly appreciating at around Y3. On the 26th, when it hit a one-year low, there was also a rapid appreciation from around 150 yen to around 149 yen.
There is a growing view that the Japanese government is using 150 yen as a line of defense. Masafumi Yamamoto, chief foreign exchange strategist at Mizuho Securities, explained: “There are a lot of foreign investors asking if there is intervention.”
Masato Kanda, the Japanese finance minister overseeing the intervention, said of currency intervention: “The general situation is not to announce it. No benefit at all “and it is not clear whether the intervention was carried out. This is a strategy designed to make speculators hesitant to sell yen by making them suspicious.
Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities, said: “Caution about intervention is pushing the yen up by around two to three yen.” Magma is gathering to sell the yen. If the “no intervention” scenario is disclosed, the view that the defense line will be lower than 150 yen will come to light, and the yen selling by speculators is likely to intensify.
After the middle of this week, there will be important events on the American side.
The Federal Reserve Board (FRB) will hold a meeting of the Federal Open Market Committee (FOMC) before November 1. While a delay in raising rates is considered almost certain, it is hard to imagine the policy of “higher rates for longer” being reversed. This is reinforcing the view that the impact on interest rates and exchange rates will be small.
On the same day, the US Treasury will present specific plans to issue debt over the next three months.
The recent sharp rise in US long-term interest rates (and the fall in US Treasury bond prices) comes against the backdrop of concerns about US finances. Xiaoqingshuizhihe, senior interest rate strategist at Nomura, said that if US Treasuries “see a larger issuance than the market expects, long-term US interest rates could rise again”. In that case, the dollar would appreciate against the yen.
The stock market will remain influenced by the interest rate moves between Japan and the United States. The rise in U.S. interest rates has weakened U.S. technology stocks, and the Japanese stock market has also been affected by semiconductor stocks. The Tokyo Electron, which contributes a lot to the stock index, fell for two consecutive weeks as of Oct. 27, with a total decline of 7.5%.
After the United States, the financial reports of listed companies in Japan will also be fully launched. A weaker yen to the ¥150 range would boost earnings for Japanese exporters such as autos, but there is a view that shares are already pricing in strong results. Since interest rates are the starting point for determining stock prices, as long as interest rates are not stable, the stock market will be volatile situation or continue.