The USDJPY pair continued its rise in the first hours of the trading session on Monday, following heavy selling in the market. US dollar traders reacted positively to news of possible intervention from the authorities, which led to a decline in the value of the dollar against the Japanese yen. The interest rate differential between Japan and the United States is expected to remain a major factor supporting the continued rise of this pair.
The next day, the USDJPY pair posted a slight rise of about a third of a percentage point at 156.91, as traders responded positively to earlier sell-offs following speculation about authorities intervening in the market. Although the USDJPY pair hit a 34-year high of 160.20 on Monday, it subsequently declined as a result of rumors about Japanese authorities’ intervention and warnings against excessive dollar strengthening.
Masato Kanda, Japan’s chief currency diplomat, declined to confirm whether authorities had intervened when questioned by media on Tuesday morning, simply saying that the Finance Ministry would release figures on currency intervention at the end of May.
However, he reiterated his warnings about the risks of excessive weakness in the Japanese yen, saying that “the currency effect has a greater impact on import prices now,” and that “excessive foreign exchange movements could affect daily life.” We “need to take appropriate action on foreign currencies.”
The overall sentiment for the markets was positive on Tuesday, with markets advancing on Wall Street. Although the focus has shifted to the Federal Reserve’s next policy decision, a string of better-than-expected earnings from major companies, including Alphabet and Microsoft, was a key driver of the latest developments, adding to confidence amid muted expectations for a US interest rate cut this year.
A slight rise in the Japanese stock market and focus on the yen’s movement
The Japanese stock market witnessed a slight rise in trading on Tuesday, April 30, 2024, thanks to widespread optimism from Wall Street during the early hours of the morning. Traders’ interests focused on the movement of the yen, as speculation circulated about the authorities’ intervention to support the currency after its decline to levels unprecedented in decades against the US dollar.
The Nikkei index, which includes 225 leading companies, rose 1.24%, to 38,405.66 points, while the Topix index, which includes all companies listed on the first section of the Tokyo Stock Exchange, rose 2.11%, to 2,743.17 points. In terms of sectors, 31 out of 33 sectors recorded an increase, with the wholesale trade sector being the best performing sector with an increase of 2.85%, followed by the oil and coal sector with an increase of 2.29%, real estate with an increase of 2.09%, and chemicals with an increase of 2.07%. In contrast, air transport stocks were the least performing, falling by 1.73%.
Shares of issuing companies rose, while shares of insurance companies led the declines. Among the notable companies, Toyota shares rose 3.65%, to 3,638 yen, while Honda shares jumped 3.51% to 1,812 yen.
In other economic news, data from the Ministry of Internal Affairs and Communications showed Japan’s unemployment rate holding steady at 2.6% in March, with the jobs-to-applicants ratio beating expectations by 1.2. The participation rate was 62.8%, in line with expectations.
Regarding industrial production, it rose by 3.8% on a monthly basis in March, which was published by the Ministry of Economy, Trade and Industry, and despite its annual decline of 6.7%, expectations indicate continued improvement in production in the coming months, with expectations of growth rates reaching 4.4% in May.
Currency pair volatility: impact of Asian markets and slowdown in Japanese retail sales
Asian markets are considered among the largest emerging markets and the most sensitive to economic and political changes. In this context, important developments in these markets can lead to significant fluctuations in currency prices, especially if events are unexpected or contradict previous expectations.
As they warn of significant rises in Asian markets on Tuesday, despite the decline of some gains due to profit-taking operations after the recent rise. In light of reports indicating an increase in factory activity in China during April, despite its slow pace compared to the previous month, the markets received additional support. The Tokyo Stock Exchange saw a rise of more than one percent, as it sought to keep pace with gains in Asian markets on Monday, when Japan was on holiday.
In another context, the Japanese Ministry of Economy, Trade and Industry announced on Tuesday that retail sales in Japan fell by 1.2% on a monthly basis in March, reaching 14.691 billion yen. Compared to the same period last year, sales increased by 1.2%. In February, sales increased by 1.7% month-on-month and 4.7% year-on-year. In the first quarter of 2024, sales reached 40.753 billion yen, stable on a quarterly basis and increasing by 2.6% year on year. Commercial sales saw a decline of 1.0% month-on-month and 1.7% year-on-year, while wholesale sales fell 0.9% month-on-month and 2.7% year-on-year, to 53.577 billion yen and 38.886 billion yen, respectively.
Regarding monetary policy, Japanese Prime Minister Fumio Kishida and chief currency official Masato Kanda declined to comment on Tuesday regarding any government moves. Kanda once again stressed Japan’s readiness to intervene in the event of uncontrolled speculative movements. The yen price stabilized at around 156.91, after reaching 156.91 during the previous day.
Fed meeting expectations and the impact of Jerome Powell’s speech on the market
There are few hopes that the Fed will make changes in its monetary policy during the next meeting. However, Bank Chairman Jerome Powell’s speech may influence market expectations. According to the bank’s policy metrics, there is only a 2.7% probability of a rate cut.
Accordingly, the Fed is likely to hold the key federal funds rate at a current level of 5.25% to 5.5%. This level remains well above the cash interest rate set by the Bank of Japan, which ranges between 0.0% and 0.1%. This difference enhances the strength of the US dollar, as investors prefer to keep their money in it to earn higher interest. This pressure on USDJPY is likely to continue, regardless of whether Japanese authorities intervene or not.
Most analysts believe that interventions are useless without support from falling interest rates. However, interest rates are unlikely to rise, as inflation remains below the BOJ’s target of 2.0%. Recent Tokyo CPI data showed a sharp decline below expectations in April, reducing the likelihood that the Bank of Japan will raise interest rates to support its currency.
Earnings results may help clarify the picture, but monetary policy remains ambiguous. “Recent economic data and dovish statements from the central bank suggest the need to postpone interest rate cuts, a trend that strengthened on Friday” with US inflation growth expectations exceeded.
Since the beginning of 2024, traders have lowered their expectations regarding the number of interest rate cuts that the bank will make, given the follow-up of inflation rising above the set target, and various indicators indicate continued strength in the economy and labor market.
However, investors are largely accepting that interest rates will remain high for a long time and feel confident in positive corporate reports.
