The Japanese Yen experienced a substantial drop after Japan's new Prime Minister, Shigeru Ishiba, announced that the economy is not ready for further interest rate hikes, causing market turbulence. Following Ishiba's statements, the Bank of Japan Governor, Kazuo Ueda, echoed similar cautious sentiments, leading the yen to fall by approximately 1.8% to an intraday low of 146.26 yen per U.S. dollar. If this trend continues, it will mark the yen's largest single-day drop since February 2023, surpassing the volatility seen in early August.
Simultaneously, U.S. Treasury bonds were sold off as U.S. job market data exceeded expectations. The yield on the 10-year U.S. Treasury note increased by about 5 basis points to 3.79%. Following Federal Reserve Chairman Jerome Powell's remarks about the continued strength of the U.S. economy, traders reduced their expectations for significant rate cuts by the Fed.
Leah Traub, a portfolio manager and head of the foreign exchange team at Lord Abbett, noted that Powell's reaffirmation of the Fed's hawkish stance compounded with the Bank of Japan's reluctance to raise rates has battered the yen. Weeks ago, the market had overly bearish sentiments towards the dollar but now has to readjust positions.
In early August, when the Bank of Japan decided to increase rates, traders hurriedly unwound their yen borrowing positions. Volatility surged as yen initially strengthened amid global large-scale sell-offs in carry trades.
Currently, with the Bank of Japan likely to delay rate hikes, the outlook for the yen is deteriorating. According to Yuya Yokota, a foreign exchange trader at Mitsubishi UFJ Trust and Banking in New York, if the Bank of Japan raises rates again as it did on August 5, it would significantly impact Ishiba's government. Therefore, the Bank of Japan is not expected to raise policy rates again this year, with yen depreciation likely to continue until the year's end.
