The yen is caught in a historic stretch of weakening that shows no sign of ending even after the Bank of Japan's first interest rate hike in 17 years, thanks to the persistently strong dollar backed by protectionist U.S. policies.
Amid the flurry of monetary policy meetings by global central banks in the second half of March, Tohru Sasaki of Fukuoka Financial Group put forward an interesting idea.
Upon cross-referencing those recent monetary policy decisions with the relative strength of major currencies over the past three years, Sasaki found that Mexico, Brazil and Switzerland -- which have some of the strongest currencies -- moved to cut interest rates. Meanwhile, Turkey and Japan, whose currencies are especially weak, opted for rate hikes.
As a country's currency appreciates, investment by foreign companies typically ebbs, slowing the economy and making rate cuts more likely. The reverse happens during periods of depreciation.
But Sasaki saw one exception: The U.S., part of the strong-currency contingent, left rates unchanged and even released an outlook putting rate cuts somewhat further off.
"The fact that foreign investment has continued even with a strong dollar is because of growing protectionism," he said. "Since the economy isn't slowing, it's hard to lower interest rates."
Rather than a shift to yen appreciation, Sasaki predicts the greenback will remain strong for some time.
U.S. President Joe Biden is pushing a "Buy American" policy as he seeks reelection in November.
"On my watch, federal projects that you fund -- like helping build American roads, bridges and highways -- will be made with American products and built by American workers creating good-paying American jobs," he said in his State of the Union address March 7.
The administration's vocal support of protectionism comes with an eye toward Biden's presumed election matchup against former President Donald Trump. In light of that, American economic policy likely will continue to put the U.S. first. Companies based outside the U.S. will have no choice but to pour money into production facilities or other investments there.
Speculators are sensitive to this dynamic. Based on data from the U.S. Commodity Futures Trading Commission, Mizuho Bank found that net long positions on the dollar against eight other currencies held by hedge funds and other speculative investors surged on March 19, just before the Federal Reserve's last meeting.
"Speculative money has flowed back into the dollar on expectations that rate cuts would be pushed back," said Daisuke Karakama, chief market economist at Mizuho.
Markets have been at the mercy of the speculation surrounding American monetary policy.
In early 2023, many market players forecast the yen strengthening against the dollar on expectations that U.S. interest rate cuts would begin as early as that year. But the Fed kept raising rates until midyear, and the yen tumbled back beyond 150 against the dollar in the fall.
This year, too, the prevailing view was that the yen would strengthen early in the year as the Fed lowered rates. Yet the Japanese currency instead crossed the 150 threshold again, spurring many to shift to a more bearish view.
Even with the BOJ scrapping its negative-rate policy, the persistent speculation about delayed U.S. rate cuts is keeping markets from seeing a clear scenario for a yen rally. If the tide does turn, it may be due to Fed rate cuts becoming a realistic possibility, or the BOJ moving early to raise rates further.
