Slowing financial stress on a global scale has made the yen-financed carry trades more attractive. This, however, increases the risk of depreciation for the currency, potentially prompting intervention from Japanese authorities, Bloomberg reported. Last week, the Global Financial Stress Indicator from Bank of America hit a four-year low, indicating a strong investor appetite for riskier assets with higher yields. Meanwhile, the yen, associated with the only major economy still implementing negative interest rates, experienced its eighth consecutive weekly decline against the dollar, marking its longest losing streak since October 2022. The anticipation that the Bank of Japan (BOJ) will enact policy tightening at a slower pace than previously expected by traders is constraining the potential for a resurgence in the country's currency, particularly against the dollar, given that US yields rank among the highest in the Group-of-10 markets. Recent data from major economies have been surpassing expectations, leading policymakers in the US and Europe to warn against assuming that interest rate cuts are imminent. Makoto Noji, chief currency and foreign bond strategist at SMBC Nikko Securities Inc. in Tokyo suggested in a research note that there is a potential for an increase in yen-funded carry trades as optimism pervades global markets. He noted, "Even if the BOJ raises interest rates marginally, the real policy rate is likely to stay negative for an extended period." Notably, the short-term policy rate set by the BOJ currently stands more than 2 percentage points below Japan's core inflation rate. The currency has depreciated beyond the levels that prompted Japan's Ministry of Finance to intervene in the market back in September 2022. Strategists in Tokyo anticipate that authorities will be on high alert if the yen depreciates to approx. 152 against the dollar. As of Monday, it was hovering around 150. Markets "can expect a step-up in verbal warnings on speculative yen moves," Alex Loo, a foreign-exchange and macro strategist at TD Securities in Singapore told Bloomberg. "Dollar-yen may take its cue from the US bond market which may push the pair past its high last year." He added. Speculators are increasingly anticipating a continued decline in Japan's currency. Data from the Commodity Futures Trading Commission shows that net yen short positions held by leveraged funds and asset managers reached their highest level since mid-2022 last week. "I see scope for dollar-yen to lift further in the near term given the still-resilient US economy," Carol Kong, a currency strategist at Commonwealth Bank of Australia stated.
