- The USD/JPY pair fell by 1.4% to 144.53 yen
- The Bank of Japan raised interest rates and expects further increases
- Other Asian currencies react differently to the unstable position of the dollar
- Peter Schiff noted that rising Japanese rates are making yen borrowing less attractive
- He warned that this could have the opposite long-term effect
On Monday, Asian currencies showed mixed results amid major stock sell-offs, concerns about U.S. economic growth, and a weak U.S. dollar. Surprisingly, this allowed the Japanese yen to stand out by strengthening against the dollar and amid expectations of interest rate hikes by the Bank of Japan (BOJ).
Japanese Yen: Strengthening Amid BOJ Policy
The Japanese yen significantly strengthened, with the USD/JPY pair falling 1.4% to 144.53 yen, the lowest level since mid-January. This occurred after the BOJ’s decision to raise interest rates and signals of possible additional hikes by the end of the year, also supported by a recovery in Japan’s services sector activity.
Mixed Results for Other Asian Currencies
However, other Asian currencies showed varied results. For instance, the Chinese yuan strengthened due to a strong fixed rate set by the People’s Bank of China (PBOC) but still fell to a six-month low against the dollar due to weak economic data and recent interventions by the PBOC.
The Australian dollar fell by 0.2% ahead of the Reserve Bank of Australia’s meeting, where no rate changes are expected due to recent data showing cooling inflation, although questionable methods of this calculation were highlighted in our previous extensive analysis. The South Korean won strengthened by 0.2%, while the Indian rupee remained close to record highs.
Decline in the U.S. Dollar Index
The U.S. dollar index and its futures fell by 0.3%, reaching a four-and-a-half-month low. Traders expect more aggressive rate cuts by the Federal Reserve, including a 74% chance of a 50-basis-point cut in September and an overall cut of 100 basis points this year. However, the Fed recently stated that rate cuts require inflation not only to reach the target of 2% but also to remain there convincingly.
Analysis by Peter Schiff: Impact of BOJ Policy Changes
Peter Schiff, head of Euro Pacific Capital and founder of SchiffGold, criticizes fiat currencies and emphasizes the value of holding tangible assets such as gold and silver.
He also provides his view on the impact of BOJ policy changes on yen trading.
The BOJ recently ended its zero interest rate policy (ZIRP), which was used to stimulate economic growth. On July 31, the BOJ raised interest rates to the highest level in 15 years and cut its bond-buying program, marking a significant policy shift. The BOJ’s board increased the overnight call rate target to 0.25%, the highest short-term rate since 2008.
Schiff emphasizes that yen trading, which involves borrowing yen at low rates to invest in high-yield assets, becomes less attractive as rates rise in Japan. This contrasts sharply with global trends where central banks in other countries are lowering rates or aiming to do so as soon as certain conditions are met.
In particular, he predicts that the potential rate cuts by the Federal Reserve and rate hikes by the BOJ increase risks and points out that Japanese stocks have already shown extreme volatility: the Nikkei 225 has fallen from recent highs, and the Topix index has dropped more than 9% in two days.
Conclusion
Schiff believes that the unwinding of yen trades could cause volatility in the global stock market since cheap borrowing has historically supported bull markets. Thus, the BOJ faces a dilemma in managing the yen, stock market stability, and government bond assets, indicating that the financial system is on shaky ground and uncertain outcomes lie ahead.
However, in reality, this chaos can be very predictable, and the Japanese economic sector has long been balancing on the edge, as could be inferred from the behavior of some of its banks, which we have previously written about.
