Disasterous day: The yen is a giant downside for Japanese officers

USD/JPY was up 220 pips on Friday and that’s not what anyone in Japan wanted to see. As bad as that looks, the reality is worse.

The persistent strength of the US dollar against the yen since mid-year is increasingly problematic and Friday we might have hit a boiling point. That’s because top Japanese officials did two things that would normally support the yen and the opposite happened. It highlights a market with abundant sellers that are unafraid.

First, the Bank of Japan hiked rates to 0.75%. That’s the highest in 30 years and though the move was widely (though not totally) expected, it still cuts down on the carry trade. Moreover, in the weeks leading up to the decision, as officials hinted that it was coming, it did nothing to stem the yen’s fall. Now, we’re just a half-cent below the November extremes.

Keep in mind that the Federal Reserve cut US rates three times in the latter part of this chart and it led to little drag. It shows that the picture is worse than it appears and that may have prompted Friday surprise jump in USD/JPY.

Secondly, Japanese finance minister Satsuki Katayama put out a rare statement late on Friday to say the ministry was alarmed over currency moves and ‘will take appropriate action’. That’s a strong hint at intervention and caused a rapid drop in USD/JPY to 156.94 from 157.34. However the market quickly concluded that buying the dip was the right trade and the move was wiped out in minutes.

So that’s two strong actions from the BOJ and the Ministry of Finance that both fell flat. Not only that but the pair looks poised to closed at the highs of the day.

Zooming out at the USD/JPY chart, it doesn’t look that bad. The November highs are still holding and the 2024 highs are more than 400 pips away. But notice the spike on the extreme left side of the daily chart. That was a level where the MoF intervened previously and they did again above 160.00.

It doesn’t end there. The USD/JPY picture understates the weakness in the yen. If we pull up the EUR/JPY chart back to the inception of the euro, we can see the pair is at an all-time high and rapidly climbing. With a synthetic euro, we would need to go back to 1991 when the Japanese economy was in a much different place.

GBP/JPY is also at a 30-year high.

There are some upshots to export competitiveness here but the brewing worry is imported inflation. Even worse, the cost of Japanese borrowing is rapidly rising. Thirty-year Japanese government borrowing costs are now at the highest in at least 30 years.

The 3.42% rate isn’t high in absolute terms but it comes after a period where the Japanese government was able to finance its massive deficits for nearly nothing.

Again, the trajectory is also very problematic. At 4% it’s likely to turn into a government crisis and that’s something Katayama surely wants to head off, which is another reason to intervene.

This whole episode is also unfolding at an interesting time. From now through New Year is the least-liquid time of year in the forex market. That might be seen as an opportunity by Katayama with the potential to squeeze shorts by deploying less ammunition than usual. I would be very wary of holding USD/JPY longs over the next two weeks because of that.