(Bloomberg) -- The yen fell sharply after Bank of Japan Deputy Governor Shinichi Uchida indicated that policymakers won’t raise benchmark interest rates further if financial markets are unstable.
The currency weakened as much as 2.5% to 147.90 per dollar after the comments Wednesday, before paring its loss to trade at around 146.81. Uchida’s remarks were the first by a BOJ board member since the bank raised rates on July 31, a move that triggered a sharp rally in the yen that reverberated across global markets.
The moves were compounded by the view the Federal Reserve will cut interest rates more aggressively than previously thought, prompting traders to rapidly unwind once-popular yen-funded carry trades, including crowded positions in US tech stocks.
“You can still get decent amount of carry by shorting the yen against the dollar, but with this unstable market, it’s just not worth it,” said Yusuke Miyairi, a currency strategist at Nomura International Plc. “We are forecasting the pair to settle around 143 by end-September.”
Uchida said that recent market moves are “extremely volatile” and the central bank needs to keep monetary policy easy for the time being. He also said the BOJ won’t raise rates when the market is unstable, pushing back on the central bank’s hawkish stance from last week. In follow-up remarks, he noted that communications with the market need to be done carefully.
“Current positioning in yen remains short, indicating potential for further movement depending on future Fed actions and economic conditions,” Charu Chanana, head of currency strategy at Saxo Markets, wrote in a note. “The risk-reward balance still leans toward further yen strengthening, with the timeline dependent on the Fed’s approach to rate cuts.”
For UBS, Wednesday’s losses are just a blip and the bank’s strategists recommend buying the yen as they forecast the currency will strengthen more than 10% by the end of 2025.
Investors may need to find as much as $1.1 trillion to pay off the yen carry-trade borrowing, economists at TS Lombard estimated, saying “this unwind seems unlikely to be over yet.”
Uchida is widely known for playing a prominent role in mapping out Governor Kazuo Ueda’s journey toward normalizing policy. The BOJ ended the ultra-easy policy in March with its first hike in 17 years.
Swaps markets are now showing a 30% likelihood of a 25 basis-points hike by the BOJ’s December policy meeting, down from more than 60% the day after last week’s move.
--With assistance from Naomi Tajitsu and Edward Bolingbroke.
(Updates with carry-trade borrowing estimate from TS Lombard in eighth paragraph.)
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