BlackRock: Intervention Won't Save the Yen, Japan's Central Bank Must Reveal Hawkish Cards

Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, stated that relying solely on government intervention is far from enough to support the yen's exchange rate; the Bank of Japan must send a clear hawkish policy signal. This week, the yen has once again approached the 160 mark against the dollar, nearing a forty-year low. This trend has partially erased the increase achieved through the coordinated intervention of the U.S. and Japan in the foreign exchange market, highlighting the limitations of such measures when the interest rate differential clearly favors the dollar. Rieder pointed out on Wednesday that foreign exchange intervention "is not the most sustainable path for a yen rebound." He further stated, "I have witnessed multiple intervention actionssustained effort requires a lot of firepower. But the key is that monetary policy must convince the market that you will raise rates and demonstrate a hawkish stance when necessary. I believe the market needs to see this from Japan." Currently, Japan's benchmark interest rate stands at just 1%, while the Federal Reserve's target range for the federal funds rate is between 3.5% and 3.75%, leaving a significant interest rate differential. In light of this dilemma, market participants are generally pinning their hopes on the Bank of Japan's tightening policy. According to insiders, the government led by Prime Minister Sanae Takaichi supports the Bank of Japan in raising interest rates soon, with the next rate hike potentially occurring in September or October. The insiders added that the Bank of Japan is concerned that the depreciation of the yen will drive up prices, and the Japanese government hopes to strengthen the effects of the recent U.S.-Japan currency intervention policy, prompting both sides to feel it is necessary to raise rates soon. Notably, with slowing U.S. CPI and PPI data coupled with falling oil prices, the market is no longer fully pricing in a rate hike by the Federal Reserve within the year. The last time the Bank of Japan raised rates was in June, when it increased by 25 basis points to 1%. Rieder expects that the Bank of Japan may raise rates again in September, but he does not rule out the possibility of delaying the decision until December. He stated, "This is crucial for market stability." Rate hikes have become the "only remedy." Beyond intervention, the Bank of Japan has become a key variable in determining whether the yen's stability can be sustained. Katsutoshi Inadome, a senior strategist at Mitsui Sumitomo Trust Asset Management, bluntly stated, "In the short term, the only remedy for a weak yen is a rate hike by the Bank of Japan." Rinto Maruyama, a senior strategist for foreign exchange and rates at SMBC Nikko Securities, warned that current bond yields and swap rates have fully priced in expectations for a September rate hike, and if the Bank of Japan delays action again, it will be viewed by the market as a "policy betrayal." Furthermore, he pointed out that if this occurs, market participants will lose confidence in the Bank of Japans ability to raise rates subsequently, leading to a renewed decline in the yen and further increases in long-term bond yields due to rising inflation concerns. Meanwhile, Masayuki Nakajima, a senior strategist at Mizuho Bank, stated that the market focus has shifted from "whether to raise rates in September" to "the pace of tightening after a rate hike." Changes in speculative positions also confirm this shift in expectations. Data from the Commodity Futures Trading Commission (CFTC) for the week ending August 4 indicates that hedge funds have halved their short positions on the yen after the coordinated actions of U.S. and Japanese officials helped stabilize it. This is in stark contrast to late June, when these funds held the largest net short positions since 2007. As of the time of this writing, the yen's exchange rate is approximately 159.48 to $1.