The Japanese yen rose in the Asian market on Monday against a basket of major and minor currencies, extending its gains for the fifth consecutive day against the US dollar, to trade above the psychological barrier of 140 yen for the first time since July 2023, amid widespread hopes about narrowing interest rate differentials between Japan and the United States.
While some members of the Bank of Japan's board have indicated their keenness to see higher interest rates in the country, the chances of the Federal Reserve cutting US interest rates at a significant pace starting in September have increased.
Price view • Japanese yen exchange rate today: The dollar fell against the yen by more than 0.5% to (139.95¥), the lowest since July 2023, from today's opening price of (140.67¥), and recorded a high of (140.90¥).
The Japanese yen ended Friday's trading up 0.75% against the US dollar, in its fourth consecutive daily gain, amid a decline in long-term yields in the United States.
The yen rose more than 1.0% last week against the dollar, its second straight weekly gain, as carry trades continued to be under pressure.
Aggressive comments Bank of Japan board member Junko Nakagawa said last week that the Bank of Japan will continue to raise interest rates if the economy and inflation move in line with its expectations.
Nakagawa explained that real interest rates are at a very low level, and that the central bank will adjust the level of monetary easing if economic expectations are realized.
Nakagawa warned of the risks of potential price increases in the country, and stressed that he sees easy financial conditions even with interest rate hikes, and suggested that the central bank review its plans to reduce purchases of Japanese government bonds in upcoming meetings.
Bank of Japan board member Naoki Tamura said the central bank should raise interest rates to at least 1% in the second half of the next fiscal year, but added that it would likely raise rates slowly and in stages.
The previous week, Bank of Japan board member Hajime Takata said the central bank should keep raising interest rates if it can confirm that companies will continue to increase spending and wages.
Japanese Interest Rates Traders still see less chance of a Japanese interest rate hike at the Bank of Japan's October meeting, with the odds of a third rate hike in December rising to 90%.
US Interest Rate • Reports in the Wall Street Journal and the Financial Times last week said that the Federal Reserve's decision next week will be difficult.
Following these reports, and according to the CME Group's FedWatch tool, pricing in the probability of a 50 basis point cut in US interest rates at the September meeting rose from 14% to 45%, and pricing in the probability of a cut fell by 25 basis points from 86% to 55%.
Interest Rate Differentials Investors have been selling the yen relentlessly for months, given Japan's low interest rates compared to elsewhere, especially the United States, which has led to a buildup of bearish positions in the Japanese currency that some have had to unwind.
The interest rate differential between the US and Japan has created a very profitable trading opportunity, as traders borrow yen at low rates to invest in dollar-denominated assets for a higher return, known as the carry trade.
Following the decisions of the Bank of Japan and the Federal Reserve in late July, interest rate differentials between Japan and the United States narrowed to 525 basis points in favor of US interest rates, the smallest gap since July 2023.
Given the current odds, the gap is expected to narrow to just 500 basis points in September, with a strong chance of the gap narrowing to 475 basis points if the Fed cuts interest rates by 50 basis points.
