Recently, the continuous weakness of the Japanese yen against the US dollar has attracted widespread attention in the financial market. Generally, changes in currency exchange rates are closely related to the interest rate spreads between Japanese bonds and US bonds. However, the recent performance of the Japanese yen has broken this conventional relationship, making market participants feel confused.
Since late April, the yield spread between 10-year US Treasury bonds and 10-year Japanese bonds has significantly narrowed, from the annual high of 3.817% on April 25 to 3.256% on Wednesday. According to traditional logic, this should be enough to prevent or even reverse the depreciation trend of the Japanese yen against the US dollar.
However, the fact is just the opposite. The Japanese yen continues to weaken, and the USD/JPY exchange rate once broke through the 162 level on Wednesday, reaching the highest level since December 1986. Although the US dollar has subsequently fallen back, the overall weakness of the Japanese yen is still noteworthy.
Regarding this abnormal phenomenon, Apollo's chief economist, Torsten Slok, told the media:
It is indeed a mystery. In theory, when Japanese interest rates rise relative to US interest rates, the USD/JPY exchange rate should fall.
According to Slok's calculations, based on the current yield levels, the USD/JPY exchange rate should be close to 140, not the current level of over 160.
Ruben Gargallo Abargues, assistant economist at Caxton Macro, also noticed this anomalous phenomenon. He pointed out that once the Fed begins to cut interest rates (expected before the end of 2024), the Japanese yen may rebound. In addition, a large number of speculative short positions on the Japanese yen may accelerate its future rebound.
Despite this, some analysts believe that the continuous weakening of the Japanese yen is still reasonable. Marc Chandler, chief market strategist at Bannockburn Global Forex, said that the decline of the Japanese yen reflects traders' reduced expectations for the Bank of Japan's reduction in its holdings of government bonds. In addition, the recent exchange rate of the Japanese yen seems to be more sensitive to changes in US Treasury yields.
It is worth noting that the depreciation of the Japanese yen seems to have a positive impact on the Japanese stock market. The blue-chip Nikkei 225 index hit a historic high of 40,913.65 on Thursday, and the TOPIX index is also approaching its historical high.