The Japanese yen sent shockwaves through global markets at the beginning of September, triggering anxieties for traders already navigating a period of high volatility. The yen, as measured by the Invesco CurrencyShares Japanese Yen Trust FXY, climbed over 0.9% by 11:30 a.m. ET. This surge was fueled by a combination of factors: hawkish remarks from Bank of Japan (BoJ) Governor Kazuo Ueda overnight and disappointing US manufacturing data.
In a parliamentary address on Tuesday, Ueda reaffirmed the BoJ’s commitment to continue raising interest rates if the economy and inflation develop as anticipated. He emphasized that the economic environment remains accommodative, despite the July rate hike, as real interest rates remain significantly negative. This hawkish stance surprised traders who were hoping for a dovish pivot from the BoJ.
Analyst Michael Gayed explained the situation, stating, “Traders hoping for a dovish pivot didn’t get it.” He highlighted that with the Federal Reserve likely to cut rates by 75-100 basis points by the end of the year and the BoJ potentially hiking at least once more during the same period, the interest rate gap between the two could narrow significantly. Gayed further predicted, “This could ultimately trigger the next rally for the yen and potentially drive stock prices higher in the longer term.”
Meanwhile, the US manufacturing sector remained in a contractionary phase for the fifth consecutive month in August. However, the pace of decline eased slightly compared to July, according to the Institute for Supply Management (ISM). Gina Bolvin, president of Bolvin Wealth Management Group, remarked, “This should be positive news for equities and keeps the door open for more rate cuts.”
Jeffrey Roach, chief economist at LPL Financial, added that manufacturing employment contracted for the third straight month as sector activity slowed. While manufacturing now accounts for a smaller portion of the overall economy than in previous cycles, investors should still brace for a broader slowdown throughout the remainder of the year.
Following the release of this data, Treasury yields dropped sharply. The yield on the 10-year bond fell 7 basis points to 3.85%. Bloomberg reported that Arif Husain, head of fixed income at T. Rowe Price, anticipates further volatility as the yen-dollar carry trade unwinds, predicting more episodes similar to the one witnessed in early August. Husain believes the yen is on an upward trend due to Japan’s ongoing structural transformation, driven by demographic shifts. He also emphasized that persistent inflation is likely to accelerate corporate reforms and influence household asset allocation.
Kamakshya Trivedi, an economist at Goldman Sachs, highlighted that the ideal macro environment for yen appreciation typically occurs when US real rates and equities decline simultaneously, often during a US recession.
However, Daysuke Takato, an economist at Bank of America, presented a contrasting perspective. He argued that the yen’s weakness has been driven by two main factors: interest rate differentials between Japan and the rest of the world and structural capital outflows from Japan. While the potential for further yen depreciation may be limited in the short term, Takato believes the yen will resume its downtrend by year-end, as structural outflows persist.
