By Noriyuki Suzuki,
The yen has won some reprieve from downward pressure after suspected recent yen-buying operations from Japanese authorities and U.S. presidential candidate Donald Trump's taking issue with too strong a dollar, but it may still take time to reverse course.
Prime Minister Fumio Kishida has been wary of inflation being pushed up by the yen's depreciation. The currency's turnaround from multi-decade lows should come as a relief for Japan, which is at a critical juncture to achieve a "virtuous cycle" between pay and prices after being long mired in deflation.
A weak Japanese currency is a mixed bag but its negative side has come to the fore, particularly its effect of boosting import costs for resource-scarce Japan.
The yen could rebound toward 150 by the end of 2024 after trading below the 160 line against the U.S. dollar for some time from late June, depending on the pace of interest rate cuts in the United States, with financial markets expecting the Federal Reserve to go ahead with a reduction in September.
Still, yen-negative factors -- some deep-rooted and hard to address -- are manifold, analysts say.
For a start, the Bank of Japan is likely to remain slow in raising interest rates for fear of hurting the economy. Japan needs to boost its potential growth rate, currently estimated at below 1 percent, for the yen to stage a real recovery.
More direct inbound investment is also critical to counter a growing appetite among Japanese retail investors to buy foreign stocks and bonds fueled by Japan's recently revamped tax-free investment program known as NISA.
So far this year, Japan has seen such outbound investment totaling around 1 trillion yen a month on average, according to government data.
A major source of uncertainty hinges on the fate of the U.S. presidential race with incumbent Joe Biden dropping out. Financial markets, particularly stocks, have been boosted recently by increasing bets that Trump, seen as pro-business and pro-tax cuts, would win.
"The yen staying at current levels makes things difficult for Japanese firms like importers," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting. "If it were around the 110-120 level, they could cope while exporters could remain profitable."
In the short term, there is a growing sense of alarm among businesses about the yen. Private consumption, which makes up more than half of the economy, remains sluggish due to rising prices of everyday goods, even though a growing number of firms have successfully passed on increased costs and raised pay for workers.
The dollar recently fell back to the 155 yen levels days after soaring to its strongest level in more than 37 years of near 162 yen, helped by suspected interventions that are estimated to have totaled over 5 trillion yen.
The U.S. currency also lost momentum on Trump's remarks on concerns over a strong dollar in an interview with Bloomberg Businessweek ahead of the November U.S. presidential election that could send him back to the White House.
A retreat of around 13 percent in the yen against the dollar so far this year reflects the wide Japan-U.S. interest rate gap. But its recent fall toward 162 was also likely led by speculators, prompting Japanese authorities to apparently step in at levels that caught some market players off guard.
Hideo Kumano, executive chief economist at the Dai-ichi Life Research Institute, is skeptical about the longer-term effects of market interventions by Japan, stressing the importance of addressing "structural factors" behind the feeble currency.
"We may see some abrupt ups and downs heading into the U.S. presidential election, but the main scenario is for a strong dollar and a weak yen over the medium term," he said.
If Trump becomes president, Japanese carmakers may boost investment in the U.S. market due to his protectionist stance, "a negative for the yen," the former BOJ official added.
After analyzing Japan's balance of payments to solve its problems, a panel of experts led by top currency diplomat Masato Kanda noted that the nation now has a "good chance" to attract direct investment, both by domestic and foreign, amid growing geopolitical risks and the need for reviewing supply chains.
While some business leaders have begun to detect signs of a potential change in the yen's rapid depreciation, private-sector advisors to the prime minister have urged the government and the BOJ to properly manage policy by monitoring the negative effects.
"When real wages rise, this should support consumption. But sentiment is already weak, which shows how sensitive Japanese people are to price hikes after years of deflation," Mitsubishi UFJ's Kobayashi said. "Whether higher wages will indeed change that stance is a big question."
Economists expect inflation-adjusted wages to start rising later this year. Sluggish consumption is seen as one factor preventing the BOJ from going ahead with another rate hike from around zero.
As the central bank is shifting away from years of massive stimulus measures, it is set to detail later in the month how it will curb Japanese government bond purchases, which have left borrowing costs depressed and helped weaken the yen.
Daiju Aoki, chief investment officer for Japan at UBS SuMi TRUST Wealth Management Co., expects that 10-year Japanese government bond yields, currently at around 1.0 percent, could rise to around 1.2 percent before the end of the year. It will still be difficult to alter the yen's weak trend as aggressive rate hikes by the BOJ are not expected, he said.
The jury looks still out on the yen's fortunes. Kanda, who leaves his post later in the month, said in a recent interview with Kyodo News that there is no limit in terms of how frequently Japan could intervene to counter volatility led by speculation. "It's a battle to defend the nation," he said.
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