- Japan’s external surplus and real yields support the currency
- Hurdle may still be high for Japan to intervene in the market
The yen is the best-performing Group-of-10 currency this year as the U.K.’s decision to leave the European Union spurs expectations that the Federal Reserve will hold rates for longer while stoking demand for safer assets.
Here are four charts to show why the yen may keep rising.
Rising External Surplus
The 10-month moving average of Japan’s current-account surplus is at its highest level since 2010 on rising investment income. The yen’s value against a basket of its peers tends to track the current account with a 12-month lag.
The real yield on Japan’s 10-year government bond rose to minus 91 basis points at the end of May after bottoming at minus 116 basis points in February, based on the latest consumer price data from the Bank of Japan. Easing inflation this year has pushed up the real yield, even as nominal yields continue to fall. One BOJ board member said that the marginal impact of the central bank’s asset purchases has already been outweighed by side effects, according to minutes from the April 27-28 policy meeting.
Going Against the Federal Reserve
The yield for U.S. Treasury 10-year note is near a record low on speculation that the U.K’s departure from the European Union may prompt the Federal Reserve to delay policy tightening. Federal-funds rate futures signaled a 12 percent chance of a December rate increase, down from 50 percent on June 23, the day before the results of the U.K. referendum.
The BOJ has never been able to counter U.S. monetary policy as far as the dollar-yen exchange rate is concerned, Daisuke Karakama, Tokyo-based chief market economist at Mizuho Bank Ltd., said in an interview. The BOJ’s easing is only effective when the Fed is tightening policy, he said.
The yen still remains more than 20 percent below levels from where Japan last intervened in November 2011, even after retracing half of its five-year rally. Japanese policy makers may also be more cautious about intervention after the U.S. listed Japan as one of the five economies for close monitoring of its currency policies.