On April 29, 2024, people line up outside a money exchange machine (L) as they wait to buy or sell foreign currency and Japanese yen along a street in central Tokyo.
Richard A. Brooks | AFP | Getty Images
The Japanese yen is hovering near a three-month low against the U.S. dollar after hitting $153.18 late Wednesday.
Previously, the weakness of the Japanese currency was thought to be due to the difference in interest rates between Japan and the United States, as lower interest rates tend to put pressure on the currency, while higher interest rates tend to push it up. Japan introduced negative interest rates for about eight years, keeping its currency weak compared to the dollar.
However, as the Federal Reserve lowered interest rates and the Bank of Japan raised interest rates, the difference in interest rates narrowed. So why is the yen depreciating now?
Alvin Tan, head of Asian currency strategy at RBC Capital Markets, said the yen remains “the lowest-yielding G10 currency ever.” G10 refers to the 10 most frequently traded currencies in the world.
Therefore, holding a long position in the yen is costly as it offers much lower interest rates than currency pairs such as the euro or the US dollar.
“The yen's one-month deposit rate is +0.03% per annum, while the US dollar's is 4.76%. This is why the yen cannot consistently appreciate despite the Fed's (or ECB's) interest rate cuts. The yen is still too large for many investors to consider holding for the long term.
Homing Li, senior macro strategist at Swiss private bank Lombard Odier, told CNBC that the recent movements in the yen are due to factors such as former US President Donald Trump's return to the Oval Office and strong US growth indicators. He said that it is likely that the fact that the company is re-evaluating the situation is also having an effect. I'm worried about Japan's upcoming election.
He added that continued volatile trading in the currency pair “may be unavoidable in the very short term” due to the US and Japanese elections.
However, Lee said further depreciation of the yen could trigger renewed intervention by Japanese authorities, noting that voters remain dissatisfied with the “extremely weak currency.”
RBC's Tan believes global risk sentiment will need to weaken sharply for the yen to appreciate, adding: “The yen benefits when global market volatility spikes. Because it's a safe currency.”
Huw Chan, chief investment advisory officer at wealth fund platform Endus, told CNBC earlier this year in the wake of the yen's volatility that he expected a period of risk-off sentiment, meaning U.S. yields would rise while U.S. yields rose. He said that when stock prices decline, the yen tends to depreciate against the dollar.
While it's true that U.S. yields are rising, stocks have been falling over the past few days, which appears to have caused the currency to fall by more than 1% on Wednesday.
The yen last traded at 152.82 yen against the dollar.
