This morning, the latest operation of the Bank of Japan surprised the market very much. On May 13, local time, the Bank of Japan cut bond purchases, and the Bank of Japan reduced the purchase amount of 5-10-year Japanese government bonds from 475 billion yen to 425 billion yen. This move has increased the market's expectations for monetary policy actions by the Bank of Japan.
It should be noted that hedge funds are sharply trimming their short bets on the yen. International leveraged investors held more than 81,000 contracts related to bets that the yen will fall in the week ended Tuesday, down nearly 27,000 from the previous week and the biggest drop since more than four years ago, according to the latest data released by the U.S. Commodity Futures Trading Commission.
Does this mean that this wave of ferocious depreciation of the yen is over?
Suddenly move
Faced with the frantic depreciation of the yen, the Bank of Japan has finally made a move.
On May 13, local time, the Bank of Japan's bond purchases decreased compared with the previous operation, and the Bank of Japan reduced the purchase amount of 5-10-year Japanese government bonds from 475 billion yen to 425 billion yen, a reduction of 50 billion yen.
This move has increased the market's expectations for monetary policy actions by the Bank of Japan. Affected by this, the yen exchange rate once rose by more than 40 points, and then the increase quickly narrowed.
Not long ago, Bank of Japan Governor Kazuo Ueda warned that the central bank may take monetary policy action if the yen's trend has a significant impact on inflation, further warning of the impact of the yen's recent sharp decline on the economy.
Since the beginning of this year, the yen has suffered a sharp sell-off, and the US dollar has risen above the 160 mark against the exchange rate, and the yen exchange rate has depreciated by more than 10% this year.
In fact, the Japanese authorities' "save the yen" operation has already begun.
The latest data from various Fed accounts suggests that Japanese policymakers may have further funded intervention in the currency market to boost the struggling yen. Data as of May 8 showed that holdings of U.S. securities by major central banks fell by about $10.6 billion, bringing total holdings to $2.95 trillion.
The data showing cash flow losses covers a week in which Japanese policymakers may have intervened in the foreign exchange market to support the yen. The balance of another cash account used by BOJ officials fell by $17.8 billion, suggesting that these funds may be used to prop up the yen at some point.
Although the Ministry of Finance has not confirmed the intervention at this time, the agency's analysis of the BOJ's accounts shows that the intervention did occur.
Foreign media analysis of the current account of the Bank of Japan shows that the Japanese authorities may have entered the market twice, according to the latest data and the estimates of money brokers, the scale of the intervention in the first time was 6.2 trillion yen, and the second was 3.2 trillion yen.
According to the latest data released by Japan's Ministry of Finance, as of the end of April this year, Japan's foreign exchange reserves were worth about $1.14 trillion, a decrease of $14.2 billion from the previous month.
Masafumi Yamamoto, chief foreign exchange strategist at Mizuho Securities, said that it is better to analyze the current account data of the Bank of Japan than to analyze foreign exchange reserves when it comes to estimating the size of the intervention. Foreign exchange reserves have received less attention recently because they are affected by a variety of factors, including fluctuations in the exchange rates of non-US dollar currencies and changes in the market value of securities held.
Short positions plummeted
Hedge funds sharply trimmed their short bets on the yen after the Japanese authorities came to a "bailout", the biggest drop since March 2020.
International leveraged investors held more than 81,000 contracts related to bets on the yen to fall in the week ended Tuesday, down nearly 27,000 from the previous week and the largest drop since more than four years ago, according to the latest data released by the U.S. Commodity Futures Trading Commission (CFTC).
However, institutions are still pessimistic about the yen's outlook, with Brad Bechtel, global head of foreign exchange at Jefferies Financial Group, saying that the intervention of the Japanese authorities has driven away short-term traders, but the broader market remains bearish on the yen.
Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore, believes that the yen could fall to 160 due to the "huge" US-Japan interest rate differential, and if US interest rates do not fall, "the impact of the intervention of the Japanese authorities will quickly dissipate" and the USDJPY exchange rate will retest the 160 level.
Bank of America expects the Fed to cut interest rates in December, and its forecast is that the yen will hit the 160 level again this year. Shusuke Yamada, head of Japanese currency and interest rate strategy at BofA Securities Japan, said, "Considering that there may not be any signs of a rate cut until September, the pressure on the yen to depreciate will continue for more than a quarter." ”
Days after suspected intervention by Japanese authorities, leveraged funds have begun betting that the dollar-yen exchange rate will return to 160 points in the coming weeks, according to options traders.
"Mrs. Watanabe" made a move
At the same time, the Japanese seem to be aggressively "shorting" the yen.
Citibank said in its latest report that Japan's household savings are showing a steady shift to investment, which has an important impact on the trend of the yen.
According to the report, the status of yen cash and deposits as assets in the minds of Japanese people is changing. At the end of the third quarter of fiscal 2024, household cash savings fell for the first time since the third quarter of fiscal 2012, according to the report.
According to the report, the Japanese "Lady Watanabe" is increasingly shifting yen deposits to risky assets.
Since some of Japan's retail investors are housewives who are in charge of household finances, the market has cleverly given them the code name: Mrs. Watanabe (Watanabe is now the fifth most popular surname in Japan, with about 1.08 million people in Japan having the surname "Watanabe").
Because "Mrs. Watanabe" has generally experienced the transition from the peak of the bubble era to the extreme decline, because she has a stronger sense of risk aversion.
During the past 25 years of deflation, the "Watanabe Lady" preferred to hold cash savings. As of the third quarter of 2023, Japanese households held more than 2,120 trillion yen ($14 trillion) in financial assets, of which 52.5% were cash and deposits ($7.35 trillion).
However, this trend appears to be changing, and the data from the Flower Report show that the foreign currency denominated assets calculated by trust funds and foreign portfolio investments held by Japanese households have increased significantly, and the weights have remained largely stable.
According to the report, due to the large scale of deposit funds, a considerable part of Japanese funds will flow into foreign securities investment under this investment trend.
The report bluntly said that even if only 1% of total assets flow into foreign currency, it means that more than 20 trillion yen (about 928.8 billion yuan) will be sold, further exacerbating the weakening of the yen.
According to the report, there is now a consensus that the yen will remain weak for some time, and Citi expects the yen to remain around the 155 level.
Editor-in-charge: Lin Gen
Proofreading: Yang Lilin