The Japanese yen finds itself under pressure as its trade-weighted gauge hits a two-decade low, signalling concerns over its weakening trend. This situation has opened the door for potential verbal intervention from Japanese officials. Historical examples of currency interventions by Japan demonstrate the government's willingness to take action when necessary. If Japan were to intervene, it could present trade opportunities for savvy investors& traders.
What Is Trade-Weighted gauge?
The trade-weighted dollar is an index created by the Federal Reserve (Fed) to measure the value of the U.S. dollar (USD), based on its competitiveness versus trading partners.
The Japanese yen is currently under pressure to weaken, mainly due to weak exports and expensive energy costs. Japan's export-driven economy is experiencing reduced demand for its products and services, which in turn decreases demand for the yen. Additionally, Japan heavily relies on importing energy resources, such as oil and natural gas, which strains the economy due to higher energy costs.
The yen has weakened beyond 140 per dollar for the first time in almost 25 years last October due to Japan's rock-bottom interest rates, while other central banks, like the Federal Reserve, are raising rates. Japan's lower price growth and years of deflation have prompted the Bank of Japan to take further actions to solidify inflation in the minds of consumers and businesses. This depreciation reflects the contrast in monetary policies and the central bank's efforts to establish inflation expectations after a prolonged period of deflation.
Historical Examples of Japanese Currency Interventions:
Japan has a history of intervening in the foreign exchange market to stabilize its currency and support its export-dependent economy.
1. The Plaza Accord (1995):
In 1985, Japan, along with other major economies, reached the Plaza Accord agreement to depreciate the US dollar against other currencies, including the yen. However, the resulting rapid appreciation of the yen raised concerns about its negative impact on Japanese exports. As a response, the Japanese government conducted interventions to weaken the yen and restore export competitiveness.
2. Yen's Rapid Appreciation (1998):
During the Asian financial crisis, the yen appreciated rapidly, posing a threat to Japan's export-oriented economy. To address this, Japan conducted a large-scale intervention in August 1998, selling yen and buying US dollars. The aim was to weaken the yen and support Japanese exporters, thereby restoring stability to the currency's exchange rate.
3. Yen's Weakness (2003-2004):
From 2003 to 2004, the Japanese government intervened to weaken the yen. The currency had been appreciating against the US dollar, which could have hampered Japan's economic recovery. Through repeated interventions, Japan sold yen and purchased foreign currencies, primarily US dollars, to stimulate exports and boost economic growth.
Possible Trade Opportunities if Japan Intervenes:
If the Japanese government decides to intervene in the foreign exchange market, traders can explore potential opportunities:
1. Yen Pairs:
Keeping an eye on yen pairs, such as USD/JPY or EUR/JPY, allows for valuable insights into potential trading opportunities. In the event of yen intervention leading to its strengthening, these currency pairs might experience a temporary downward movement. Traders could seize the chance to enter short positions on these pairs, with the aim of profiting from potential yen appreciation.
2. Export-Focused Stocks:
A weaker yen can provide a competitive edge for Japanese exporters in global markets. Identifying companies that heavily rely on exports and investing in their stocks during a potential yen depreciation could yield favourable returns. However, careful research and consideration of other market factors are vital when selecting specific stocks.
3. Japanese Equity Market:
The Japanese equity market as a whole can benefit from a weaker yen. Increased export competitiveness has the potential to bolster corporate earnings and subsequently drive up stock prices. Investors may want to explore opportunities by investing in Japanese equity index funds or individual stocks, taking advantage of potential market trends stemming from yen depreciation.
Conclusion:
The pressure on the yen due to its trade-weighted gauge hitting a two-decade low raises concerns about its weakness. The history of Japanese currency interventions highlights the government's willingness to take action to stabilise the yen. If Japan intervenes, it could present trade opportunities, particularly in yen pairs, export-focused stocks, and the Japanese equity market. However, traders should exercise caution, conduct thorough analysis, and account for various factors that can impact currency interventions and their outcomes.