The Chances of a Japanese Yen Collapse
Japanese yen extended its losses against the US dollar to 20% year-to-date and 35% since the start of 2021 on Thursday, September 1, 2022, as USD/JPY reached its highest prices since August 1998.* Inflation woes continue to pair with a wide discrepancy between US and Japanese interest rates - US 10YR rates are 3.3% compared to Japan’s 0.2%† - causing flows out of JPY into USD.
Historical USD/JPY Prices (Daily 11/1/21 to 9/1/22)
How Low Can Japanese Yen Go?
Historical extremes have found USD/JPY reaching heights of 147.63 in 1998 and 159.88 in 1990 compared to current prices circling 139.00. However, the major forex pair has only spent 51 trading days of the last 30 years above 140, and derivatives markets are quoting less than a 20% chance of the yen closing the year on worse standing than that seen in 1998.‡
Historical USD/JPY Prices (Monthly 1/1/90 to 9/1/22)
It’s difficult to make a case for a JPY comeback story as the Bank of Japan noted that they would continue quantitative easing into the future at their July meeting,** which could further the interest rate gap between Japan and the US if the latter continues to hike rates. Not to mention the consistency with which USD/JPY has risen through these historical levels – the pair has closed 12 of the last 16 trading days higher.
On the other hand, the tides could turn if inflation readings in the US fall, as inflation has been highly correlated to projections for US interest rates. While the spread between US and Japanese rates is trending in one direction these days, no market is unidirectional into perpetuity; even a slight convergence coming from either side could be enough to knock USD/JPY from its highs.
But where will those highs take place? Whether USD/JPY is headed for a new normal or a reversion to historical averages is still unclear, but it’s hard not to have an opinion one way or the other at such a significant inflection point.
*Source: IG US as of 9/1/22
†Source: Trading Economics as of 8/31/22
‡Source CME Group as of 8/31/22
**Bank of Japan Statement on Monetary Policy 6/21/22
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