Fund outflows by retail investors are weighing on the yen. Japanese purchases of overseas equities through investment trusts exceeded 1 trillion yen in the first two months of this year partly thanks to the introduction of the nation’s new tax-exempt retirement savings system, known as NISA.
The bigger picture is that Japan’s investors and companies are parking more of their cash in higher-returning investments overseas. That can be seen in the basic balance, a broad measure of capital flows, at 2.2 trillion yen in deficit on a rolling six-month basis, according to a Bloomberg analysis of Japan’s balance-of-payments data.
The fundamental problems for the yen’s weakness against the dollar include the low potential economic growth in Japan, fiscal deficit and structural issues with the trade balance.
The Japanese regulator has ratcheted up its warnings against speculative moves in the yen, which reached the weakest level in about 34 years against the dollar last week. The currency has slipped beyond levels that prompted authorities to enter the market in 2022.
According to some of Japan's largest brokerages, the authorities are likely to target a 3-5 yen per dollar decline in USDJPY if they decide to intervene in currency markets.
“Should authorities use several trillion yen to intervene, like they did in 2022, that may amount to operations to boost the yen’s value by four to five yen per dollar," said Yujiro Goto, head of Japan currency strategy at Nomura Securities Co.
Finance Minister Shunichi Suzuki said last week that the government is willing to take “bold measures against excessive moves." But there’s skepticism in the market on whether intervention would be able to keep the yen strong for long, considering that a wide yield gap between US and Japanese bonds has pressured the currency to weaken.
The first interest-rate hike last month by the Bank of Japan since 2007 did little to narrow that differential, which shows US Treasury yields about 3.5 percentage points higher than Japanese debt. Weakness in the yen appears set to continue unless expectations increase again of a Federal Reserve rate cut.
Japan's foreign-exchange reserves totaled $1.15 trillion at the end of February, with Goldman Sachs Group Inc. estimating that about $175 billion of that is dollar funds that authorities can use to intervene without selling long-term securities.
The Ministry of Finance spent more than ¥9 trillion ($59 billion) three times in September and October 2022. On its first intervention, the Japanese currency gained more than five yen.
“An intervention of about ¥1 trillion in size may lift the yen by slightly less than one yen per dollar when calculating based on the currency’s demand and supply conditions," said Kenta Tadaide, chief currency strategist at Daiwa Securities Co.
The likelihood of Japan intervening in the currency market will increase if USDJPY rises to the 152-155 yen zone or if one-month implied volatility exceeds 10% from the current 8%, strategists at Bank of America Corp. said.
The overall recommendation is to sell USDJPY.
Profit could be taken at 148.50.
Loss could be fixed at the level of 153.00.
This content is for informational purposes only and is not intended to be investing advice.
