- The Japanese yen has strengthened sharply against the US dollar amid speculation of coordinated Japanese and US intervention.
- Reports of US ‘rate checks’, and firmer language from Japanese officials increased expectations of policy action.
- Japanese equities fell as yen strength weighed on exporter-heavy sectors.
- Currency volatility has coincided with rising and more volatile Japanese government bond yields, with markets sensitive to further policy signals.
Kate Marshall, lead investment analyst, Hargreaves Lansdown:
“The yen has strengthened sharply after renewed speculation of Japanese and US intervention in currency markets, rising from around 159 against the US dollar at the end of last week to as strong as roughly 153.8 in early trading on Monday, its strongest level in around two months.
The move followed reports that US authorities had contacted market participants to assess trading conditions in the dollar–yen pair, a step often viewed as a precursor to direct intervention, alongside increasingly firm language from Japanese officials. Together, these signals reinforced expectations that any action to support the yen could be coordinated between Japan and the US.
The immediate impact has been felt in Japanese equities, with the Nikkei 225 falling around 1.7% as the stronger yen weighed on exporter-heavy sectors. A rising currency reduces the value of overseas earnings when translated back into yen, and sharp currency moves typically trigger a knee-jerk sell-off in areas such as autos, technology and industrials.
Beyond the initial reaction, the implications for equity markets are more complex. If yen strength proves persistent, it could increase volatility by encouraging an unwind of long-established carry trades, where investors have borrowed cheaply in yen to invest in higher-returning assets elsewhere. Any meaningful repatriation of capital back into Japan would represent a shift in global capital flows and could create short-term pressure in overseas equity markets, including the US.
However, a stronger yen is not necessarily negative for Japanese equities over the longer term. Greater currency stability improved domestic confidence and a reduced reliance on exchange-rate weakness to support profits could ultimately underpin more sustainable earnings growth. In the near term, equity markets are likely to remain sensitive to further signals from policymakers in Japan and the US, with currency volatility adding an extra layer of uncertainty for investors.”
Hal Cook (pictured above), senior investment analyst, Hargreaves Lansdown:
“Japanese government bond yields have been rising in recent years, but the spike upwards, and volatility, in the last couple of weeks has been big.
The volatility has been in long-dated government bond yields. The 40-year yield went over 4% last week. Low compared to yields from other countries, but for Japan that’s unheard of (it’s literally the highest they’ve ever been). During the Liberation Day flight to safety last April, the same bond yields went as low as 2.6%.
The cause is a combination of increases to long-term inflation expectations alongside unease around Sanae Takaichi’s plans for the government finances, which appear to be ‘cut taxes and increase spending’. The use of resulting expected higher economic growth to fill the higher deficit has rings of the UK’s Truss-Kwarteng mini-Budget in 2022 and investors are sceptical.
The Bank of Japan were clear on Friday that they would step in if required to support the government bond market. This has calmed investor concerns for now and yields have fallen since. All eyes now turn to the snap election called for 8 February. Further volatility is expected.”
