Summary of Key Points
On August 31st, the Japanese yen once again fell below the 160 per US dollar mark, sparking speculation about potential joint intervention by the United States and Japan. However, US Treasury Secretary Janet Yellen clarified that the current trend of the yen is "controllable" and does not require intervention. Due to the interest rate differential between the US and Japan and pressure from the US, markets expect the Bank of Japan to raise interest rates earlier than expected, possibly in September. Meanwhile, Citibank has coined the term "Bennettism" to discuss whether Yellen's policies could lead to changes in global currency market rules. The underlying pressures for the yen's weakness over the medium to long term remain unresolved.
Detailed Analysis
1. The yen falls below 160 again: Will the US and Japan intervene together this time?
The direct cause of the yen's decline below 160 was the "hawkish remarks" by Federal Reserve Chairman Jerome Powell, who stated a firm commitment to fighting inflation. This led the market to believe that the US might raise interest rates again, strengthening the dollar and causing the yen to depreciate. The 160 level is significant; in August, the yen even dropped to 164, its lowest level in 40 years, and it is rare for the US and Japan to intervene jointly. However, Yellen indicated that the current market trend is not as chaotic as in the past, suggesting that no immediate intervention is needed.
How much did Japan spend on previous interventions? From July 30th to August 26th, Japan spent 15.4 trillion yen (about $96.4 billion), setting a new monthly record. Although the yen briefly rose to 155 following the intervention, it quickly returned to around 160, indicating that the underlying issues causing the yen's depreciation persist. Simply dumping money into the market is only effective in the short term.
2. Is the Bank of Japan going to raise interest rates earlier? The interest rate differential between the US and Japan is the main culprit
The core issue behind the yen's depreciation is the interest rate differential: interest rates in the US are high (around 5% currently), while those in Japan are low (almost zero). As a result, capital flows to the US to earn higher returns, weakening the yen. To stabilize the yen, the interest rate differential needs to be reduced either by the US lowering rates or Japan raising them. Markets now expect the Bank of Japan to raise rates in September; previously, Fidelity predicted this would happen in December, but now the expectation has moved up to October or even September, as Japan's government faces less resistance to raising rates due to US intervention. Goldman Sachs is even more bullish, predicting a rate hike in September, citing Japan's inflation expectations approaching 2% and the urgency of addressing yen depreciation compared to wage growth. Yellen also specifically praised Bank of Japan Governor Haruhiko Kuroda, implying that he will take the right course of action (i.e., raise rates).
3. What is "Bennettism"? Could it change the rules of the global currency market?
Citibank has introduced this term to describe a new policy framework proposed by Yellen, which includes five key areas: economic security, mutually beneficial trade, new economic rules, maintaining financial competitiveness, and providing more benefits for US workers. The goal is to address global economic imbalances (such as the US having a large trade deficit). This is somewhat similar to the Plaza Accord of 1985, when the US, Japan, Germany, France, and the UK jointly worked to weaken the dollar. Citibank believes that a major shift has not yet occurred, but the joint intervention by the US and Japan could be a signal that more countries may join in managing exchange rates. For example, if the yen appreciates and drives Asian currencies stronger, Europe might also pressure other countries not to depreciate their currencies.
4. Will the yen remain weak in the medium to long term? The underlying pressures are not easily resolved
While short-term interventions or rate hikes may stabilize the yen temporarily, its long-term performance will still depend on the interest rate differential between the US and Japan. If the Fed does raise rates again and Japan does not raise them sufficiently, the differential will remain large, and the yen will continue to depreciate. Fidelity predicts that by the end of 2026, the dollar will trade between 150 and 155 against the yen, which is slightly better than the current level of 160, but still not back to previous levels. Additionally, Japan faces persistent structural problems such as an aging population and insufficient domestic demand, making it difficult for the yen to strengthen in the long term. Even if there is a short-term rebound, the underlying pressures will likely persist, leading to a continued weak yen trend.
5. From "Abenomics" to "Kuroda Economics": Is Japan's policy changing?
Yellen also mentioned that Japan has successfully fought deflation, and policies such as massive money printing and government spending (Abenomics) may be coming to an end. Japan is transitioning to a more market-oriented approach, such as relaxing labor regulations and reducing government intervention, which is more in line with US interests. This shift is influenced by the US; Yellen and Kuroda have known each other for 15 years and have a good personal relationship. Yellen aims to align Japanese policies with US interests, such as reducing the trade surplus with the US.
In summary, the yen's decline below 160 is just a surface phenomenon, reflecting the ongoing competition between US and Japanese monetary policies and potential changes in global currency market rules. Investors should pay close attention to Japan's interest rate hike in September and the Fed's actions, as these factors will be crucial in determining the yen's future direction.