The yen could fall further in the coming weeks after breaking through a crucial support level against the US dollar and hitting a 50-year low against the currencies of Japan’s most important trading partners, analysts have warned.
JPMorgan Chase cautioned in a report that if the yen continued to depreciate sharply in 2022, it could trigger a long-predicted capital flight by Japanese households. At that point, the report’s authors said, verbal intervention by the Japanese authorities — and even a surprise uptick in inflation — may not be enough to arrest the slide.
The predictions of even deeper weakness for the Japanese currency followed its decline to a five-year low of ¥116.34 against the dollar last week.
JPMorgan’s report also highlighted that the yen’s daily real effective rate, an index that reflects the yen’s strength against other currencies by combining its trade weighting with consumer and producer prices, had fallen to its lowest level in five decades, although directly comparable data do not go back as far as the 1970s.
Benjamin Shatil, a foreign exchange strategist at JPMorgan, said: “We think it is safe to say that the real effective rate of [the yen] finally has hit a 50-year low.”
An important part of that calculation, Shatil added, was the increasing contribution of China’s renminbi in the yen’s trade-weighted index. The rising scale of commerce between China and Japan meant that the Chinese currency had a much greater share in that index than the US dollar, and the yen was much more sensitive to the renminbi’s appreciation than it had been in the past.
Still, Shatil said, the spread of the highly transmissible Omicron coronavirus variant was muddying the picture. “The lion’s share of the movement [of the dollar rising against the yen] last year was this reflation theme,” he said. “That is messier now with the new Covid wave. This pure expression of reflation by shorting the yen is less clear cut at this time”.
Traders said that foreign investors have begun rebuilding large yen-short positions after the holiday lull — meaning they are betting against the currency.
A short position against the yen, said traders, was a popular proxy for a bet that US interest rates will trend higher but that the Bank of Japan will remain indefinitely locked into its ultra-easy policy stance.
Several analysts said that there was no particular reason why the yen, which was recently trading at ¥115.35 against the dollar, could expect to find rock-solid support at any level between there and ¥120 to the greenback.
“I don’t think we can assume there are hard floors on the yen at the level we are at today,” said Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs. “The Japanese economy is further away from a full recovery than its peers.”
Shusuke Yamada, chief Japan forex and equity strategist at Bank of America, said it was difficult to argue the case for a stronger yen in 2022, with the most plausible outcome being a slow grinding lower against the dollar. He agreed that the level of ¥120 did not represent a hard floor.
“Policymakers might start mentioning the cheapness of the yen at that [¥120 per dollar] level but could it weaken past there? Yes, if the US economy remains strong and the Fed is on course to hike rates and implement quantitative tightening,” said Yamada.
