Sat. Jan 22nd, 2022

The yen could fall further in the coming weeks after breaking through a crucial support level against the US dollar and reaching a 50-year low against the currencies of Japan’s main trading partners, analysts have warned.

JPMorgan Chase warned in a report that if the yen depreciates sharply in 2022, it could cause a long-predicted capital flight by Japanese households. At that point, the authors of the report said, verbal intervention by the Japanese authorities – and even a surprise rise in inflation – may not be enough to tighten the slide.

The predictions of even deeper weakness for the Japanese currency followed its decline to a five year low of ¥ 116.34 against the dollar last week.

JPMorgan’s report also highlighted that the yen’s daily real effective rate, an index that reflects the yen’s strength against other currencies by combining its trading weight with consumer and producer prices, fell to its lowest level in five decades, although directly comparable data does not apply. back as far as the 1970s.

Benjamin Shatil, a foreign exchange strategist at JPMorgan, said: “We think it is safe to say that the real effective rate of [the yen] has finally reached a 50-year low. “

An important part of that calculation, Shatil added, was the increasing contribution of China’s renminbi in the yen’s trade-weighted index. The rising volume of trade between China and Japan meant that the Chinese currency had a much larger share in that index than the US dollar, and the yen was much more sensitive to the renminbi’s appreciation than it had been in the past.

Yet, Shatil said, the spread of the highly transmissible Omicron coronavirus variant clouded the picture. “The lion’s share of the movement [of the dollar rising against the yen] last year it was reflection theme“It is now more messy with the new Covid wave. This pure expression of reflection by the yen short is less clear at present.”

Traders said foreign investors are starting to rebuild big yen-short positions after the holiday lull – meaning they betting against the currency.

A short position against the yen, traders say, was a popular proxy for a bet that US interest rates will trend higher but that the Bank of Japan will remain locked in its ultra-easy policy stance indefinitely.

Several analysts said there was no specific reason why the yen, which recently traded at 115.35 yen against the dollar, could expect to find rock-solid support at any level between there and 120 yen for the dollar.

“I do not think we can accept that there are hard floors on the yen at the level we are at today,” said Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs. “The Japanese economy is further away from a full recovery than its peers.”

Shusuke Yamada, chief Japanese forex and equities strategist at Bank of America, said it was difficult to argue the case for a stronger yen in 2022, with the most likely outcome a slowing down against the dollar. He agreed that the level of ¥ 120 does not represent a hard floor.

“Policymakers may start to mention the cheapness of the yen. [¥120 per dollar] level but can it weaken beyond that? “Yes, if the US economy stays strong and the Fed is on track to raise rates and implement quantitative easing,” Yamada said.

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