Hold Off on Buying Yen? Dollar Demand Pressures Yen as Market Expects 170 Level

The yen has recently depreciated beyond 163 per dollar, marking its lowest level in nearly 40 years since December 1986. This decline is primarily driven by increased dollar buying and simultaneous yen selling pressure. Escalating U.S.-Iran tensions have boosted safe-haven flows into the dollar, while market concerns over Japan's Koshi administration expanding fiscal spending and maintaining loose monetary policy have further weakened the yen. Amid multiple headwinds, markets are now beginning to anticipate that the yen could fall further toward the 170 level.

Since July, the yen had been trading in a narrow range around 162 per dollar, but this balance was broken on Monday (21st).

Previously, as markets expected foreign exchange intervention by the Japanese government and the Bank of Japan, some investors attempted to buy yen. This sharp decline is believed to have been triggered by stop-loss orders from those investors.

Foreign exchange traders at domestic Japanese banks noted that the current market trend is difficult to resist, and the number of market participants expecting further yen depreciation is increasing.

Underlying the exchange rate weakness are macroeconomic drivers for both the dollar and the yen. On the dollar side, renewed conflict between the U.S. and Iran—effectively breaking the previous memorandum on ending hostilities—has raised market concerns that the Middle East situation could further deteriorate, reigniting 'safe-haven dollar buying' trades.

At the same time, the benchmark international crude oil price, West Texas Intermediate (WTI) futures, rose to around $88 per barrel, hitting a one-month high.

With expectations of high inflation pressure prompting the U.S. Federal Reserve to proceed with rate hikes, the yield on U.S. two-year Treasury bonds climbed to around 4.26%, the highest level in 1 year and 5 months, further attracting strong dollar demand.

Given Japan's heavy reliance on crude oil imports, rising oil prices have heightened market awareness of potential deterioration in the trade balance, intensifying the trend of buying dollars and selling yen.

On the other hand, the yen's own burdens have also come to the surface. On Monday, Japan's Cabinet approved the 'Basic Policy on Economic and Fiscal Management and Reform,' pushing the yen further down to the 163 per dollar range.

The first policy under the Koshi administration emphasizes a shift toward proactive fiscal policy. The previous year's long-standing phrase 'fiscal consolidation' has been replaced with 'fiscal sustainability.'

Although a subsequent revised version added a footnote stating that 'specific monetary policy tools are autonomously decided by the Bank of Japan,' most analysts believe that given the Koshi administration's inclination toward expansionary fiscal and accommodative monetary policies, yen selling pressure will persist.

Amplified by both yen selling and dollar buying, the yen has become the weakest among the ten major developed economy currencies with high trading volumes, depreciating 0.6% against the dollar over the past two weeks—the worst performer.

With the yen continuing to weaken, the focus now turns to whether Japan will implement yen-buying foreign exchange intervention and when the Bank of Japan will next raise interest rates.

Nomura Securities senior interest rate strategist Mari Iwashita analyzed that if the exchange rate hits 165 per dollar before the central bank raises rates, the BOJ might launch FX intervention to buy time.

SBI FX Trade senior advisor Yuji Saito pointed out that if intervention is delayed, curbing yen depreciation would require the BOJ to deliver an unexpectedly large rate hike.

Although Japanese Finance Minister Katsunobu Kato stated that 'appropriate and resolute measures will be taken at any time,' markets generally believe that intervention cannot solve the fundamental issues.

Resona Bank's market trading room advisor Shinsuke Nakazato went further, stating that a scenario where the exchange rate falls to 170 per dollar must be considered realistic. Market vigilance over the continued trend of dollar strength and yen weakness remains difficult to dispel.