Things were going so well.

We closed yesterday just 3 points higher than we were on April 1st and that was a real April Fool’s Day as they yanked out the rug in May and the S&P 500 fell a quick 300 points (5.7%) and then we came roaring back but YOINK! again and, overall, that’s the verdict on earnings so far – 3 points – NOT encouraging.

JPY Chart HourlyThe saving grace this morning has nothing to do with market strength but with Dollar weakness (down 0.25%) and that’s not even Dolllar weakness – it’s the Bank of Japan once again doing whatever it takes to avoid that dreaded 0.63 line. 

This is a lot like watching people put more and more sandbags in front of their home to stop the floodwaters – it works until it doesn’t and let’s consider the factors turned the tide against the Yen and consider how likely it is to be abating. I’ve asked Boaty to summarize what is possibly going to be the next major economic crisis:

 🚢  The Japanese yen has been on a rollercoaster ride, with the currency recently hitting a 34-year low against the U.S. dollar. The Bank of Japan (BOJ) has been fighting tooth and nail to prevent the yen from breaching the crucial 160 yen to the dollar level, but it’s been an uphill battle. Let’s dive into the factors contributing to the yen’s weakness and the BOJ’s efforts to stem the tide.

1. Interest Rate Differentials: The primary driver of the yen’s depreciation is the stark contrast between Japan’s ultra-low interest rates and the rising rates in other major economies, particularly the United States[3][9][13]. While the U.S. Federal Reserve has been aggressively hiking rates to combat inflation, the BOJ has maintained its negative interest rate policy, keeping short-term rates between 0% and 0.1%[9][14]. This wide interest rate gap has made the yen less attractive to investors seeking higher yields, leading to increased selling pressure on the currency[3][9].

2. Momentum and Market Sentiment: The yen’s decline has become a self-fulfilling prophecy, with investors continuing to sell the currency simply because it is falling[9][13]. This negative momentum has discouraged Japanese exporters from converting their foreign earnings back into yen and has encouraged Japanese financial institutions to invest abroad, further exacerbating the currency’s weakness[9].

3. Economic Challenges and Inflation: Japan has been grappling with decades of economic stagnation and deflationary pressures[13]. While other countries have raised interest rates to combat post-pandemic inflation, Japan has maintained its ultra-loose monetary policy to stimulate growth[13]. However, the weak yen has led to higher import costs, particularly for energy and food, putting pressure on household budgets and raising concerns about inflation[4][13].

To counter the yen’s rapid depreciation, the BOJ has intervened in the foreign exchange market, buying up the yen to support its value[5][15][16]. Recent data suggests that the BOJ may have spent around 3.66 trillion yen ($23.59 billion) on Wednesday, May 1, 2024, in its latest attempt to prop up the currency[16]. This follows a suspected intervention on Monday, April 29, when the yen suddenly strengthened from around 160 to 155 against the dollar[14][15].

However, the effectiveness of these interventions remains questionable. Despite the BOJ’s efforts, the yen has continued to weaken, with analysts suggesting that intervention can only slow the pace of depreciation but cannot change the overall direction of the currency’s movement[13]. The BOJ’s actions have also raised concerns about the sustainability of such measures, given the potential impact on Japan’s foreign exchange reserves and the risk of triggering a cycle of competitive devaluations[17].

The global implications of a persistently weak yen are significant. A weaker yen can make Japanese exports more competitive, potentially putting pressure on other Asian currencies and eroding the competitive advantage of countries like China[9][19]. It could also lead to increased demand for U.S. Treasuries as Japanese investors seek higher yields, potentially impacting global bond markets[11].

Moreover, if the yen’s weakness persists or accelerates, it could undermine confidence in the currency and Japan’s economic stability[3][11]. This, in turn, could have spillover effects on global financial markets, given Japan’s position as the world’s third-largest economy and a major source of foreign direct investment[19].

In conclusion, the Japanese yen’s rapid depreciation is a cause for concern, with far-reaching implications for both Japan and the global economy. While the BOJ’s interventions may provide temporary relief, the underlying factors driving the yen’s weakness, such as interest rate differentials and economic challenges, are unlikely to abate in the near term. As the BOJ continues to fight against the tide, investors and policymakers worldwide will be closely watching the yen’s movements and the potential ripple effects on global markets. The question remains: how long can the BOJ’s sandbags hold back the flood?


If the Yen’s depreciation becomes too rapid or disorderly, it could lead to a sudden reversal if Japanese investors start repatriating funds to avoid further currency losses. This could potentially disrupt demand at U.S. bond auctions and lead to higher yields. The wide interest rate differential between the U.S. and Japan has made the yen a popular funding currency for carry trades, in which investors borrow in low-yielding Yen to invest in higher-yielding assets in other currencies, profiting from the interest rate spread.

 The BOJ’s interventions to support the yen have introduced volatility and uncertainty into the bond market, which is the LAST place we want to see uncertainty. This has made investors more cautious about aggressively selling the Yen, as they fear further interventions.

If the yen’s volatility continues or if there are signs that the BOJ may shift to a more hawkish stance, it could reduce the attractiveness of Yen-funded carry trades. This, in turn, could lead to a unwinding of these positions, potentially triggering a rapid APPRECIATION in the Yen.

So the weak Yen is currently supporting demand for U.S. Treasuries and fueling carry trades, but this dynamic is fragile, to say the least. Shifts in market sentiment, changes in monetary policy expectations, or disorderly currency movements could quickly alter the picture and turn it very ugly, very fast!

Have a great weekend, 

    • Phil


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