Yen Value Recovers to 147 Yen Range After 2 Months... Expectations for End of Yen Weakness

Position Adjustment Impact Recovers to 147 Yen Range
Speculative Forces Continue Yen Weakness Betting
Yen Value Expected to Decline After Holiday

The value of the yen against the dollar recovered to the 147-yen level for the first time in two months, putting a brake on the relentlessly soaring exchange rate. Some suggest that the yen's shift to a strong phase since mid-month may mark the end of the yen's depreciation. However, the market largely views this as a temporary phenomenon due to position adjustments by overseas investors.

[Image source=Reuters Yonhap News]

On the 21st, the yen's value against the dollar briefly reached 147.17 yen during the trading session. It was the first time since September 14, about two months ago, that the yen recorded a level in the 147 yen range after previously surpassing 150 yen. The yen weakened again on the 22nd, trading at 148.23 yen as of 10 a.m. that day.

The yen's value rose as expectations grew that the U.S. Federal Reserve (Fed) would end interest rate hikes due to slowing inflation in the United States. The U.S. 10-year Treasury yield, which had exceeded 5% last month, fell to the 4.3% range the day before. The dollar also weakened amid hopes for the end of tightening.

However, some argue that the yen's strength cannot be explained solely by expectations regarding U.S. monetary policy. Since the interest rate gap between the U.S. and Japan has not narrowed as much as expected, enthusiasm for the yen carry trade remains unabated. The yen carry trade involves borrowing low-interest yen to sell and using the funds to operate high-interest currencies. Speculative forces engaging in the yen carry trade sell yen to profit from the interest rate differential between the U.S. and Japan, making it one of the main causes of yen weakness. However, following the decline in U.S. Treasury yields the previous day, Japan's 10-year government bond yield also fell to 0.690% at one point during the session, indicating that the U.S.-Japan interest rate gap has not significantly narrowed.

Nihon Keizai Shimbun explained, "Looking at the interest rate differential alone, the market is still favorable for speculative forces to engage in the yen carry trade," adding, "Since the environment surrounding the yen has not changed, most market participants did not predict a sudden shift to a strong yen phase."

Experts argue that this is merely a temporary market change due to year-end holidays. Overseas investors reportedly entered position adjustments ahead of the Thanksgiving holiday on the 23rd, leading to an inflow of yen buying. The Japanese market was also closed on the same day for Labor Thanksgiving Day. Nihon Keizai Shimbun stated, "Speculative forces that had been selling yen and buying dollars, focusing on the U.S.-Japan interest rate gap, are now unwinding their positions."

Accordingly, the yen is expected to weaken again after Thanksgiving. Bloomberg cited data from the U.S. Commodity Futures Trading Commission (CFTC), reporting that leveraged funds' net short (declining) positions on the yen reached about 65,000 contracts in the week ending on the 14th, the highest since April last year. This indicates that speculative forces still weigh the possibility of yen weakness.

Ueno Daisaku, Chief Foreign Exchange Strategist at Morgan Stanley MUFG Securities, stated, "When market participants return from holidays, yen selling is likely to dominate again, leading to further yen weakness."

This content was produced with the assistance of AI translation services.