According to analysts, the yen could fall further in the coming weeks after breaking above key support levels against the US dollar and hitting 50-year lows against currencies of Japan’s most important trading partners.
JPMorgan Chase cautioned in a report that if the yen’s rapid depreciation continues in 2022, it could trigger a long-anticipated capital flight by Japanese households. At the time, the report’s authors said, verbal intervention by Japanese officials — and even a surprising rise in inflation — may not have been enough to arrest the slide.
Predictions of even deeper weakness for the Japanese currency fell to a five-year low of 116.34 against the dollar last week.
The JPMorgan report also reported that the yen’s daily real effective rate, an index that reflects the yen’s strength against other currencies by combining its trade weights with consumer and producer prices, was at its lowest level in five decades. Although directly comparable data does not lead to the 1970s.
Benjamin Shatil, forex strategist at JP Morgan, said: “We think it is safe to say that the real effective rate [the yen] It has finally hit a 50-year low.”
A significant part of that calculation, Shatil said, was the rising contribution of China’s renminbi to the trade-weighted index of the yen. The increasing scale of commerce between China and Japan meant that the Chinese currency had a much higher share in that index than the US dollar, and the yen was more sensitive to the appreciation of the renminbi than before.
Still, Shatil said, the spread of the highly transmissible Omicron coronavirus variant was distorting the picture. “Lion’s Share in the Movement” [of the dollar rising against the yen] Last year it was the reflection theme,” he said. “It is a mess now with the new Covid wave. This pure expression of reflection by shortening the yen is less clear at the moment”.
Traders said foreign investors have begun to rebuild large yen-short positions after the holiday calm – meaning they are betting against the currency.
Traders said a short position against the yen was a popular proxy for a bet that US interest rates would rise, but the Bank of Japan would remain indefinitely locked in its ultra-easy policy stance.
Several analysts said there was no specific reason why the yen, which recently traded at 115.35 against the dollar, could expect rock-solid support to be there and any level between 120 and the greenback.
“I don’t think we can assume that there are hard floors on the yen at today’s levels,” said Zack Pandal, co-head of forex strategy at Goldman Sachs. “The Japanese economy is far from fully recovering compared to its peers.”
Bank of America chief Japan forex and equity strategist Shusuke Yamada said it was difficult to argue the case for a stronger yen in 2022, with the most plausible outcome being a slower depreciation against the dollar. He agreed that level 120 does not represent a hard floor.
“Policy Makers Might Start Mentioning The Affordability Of The Yen At That Time” [¥120 per dollar] level but can it weaken from there? Yes, if the US economy remains strong and the Fed is prepared to increase rates and implement quantitative tightening,” Yamada said.
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