Yen stays close to 160 per dollar: the sticking point is the gap between Tokyo and Washington

A government that encourages the central bank to raise rates is a rarity, and that is what is happening in Japan: according to government sources reported by Bloomberg, the administration led by Sanae Takaichi is in favor of an increase in the cost of money decided by the Bank of Japan as early as September or October. The opening, however, has not moved the exchange rate: the Japanese currency remained at around 159.36 per dollar, just below the 160 level that in recent years has acted as an alarm threshold for the authorities in Tokyo.

The reason for the resistance lies in the distance between the two sides of the Pacific. Japan’s benchmark rate stands at 1%, the highest level since September 1995, while in the United States the Federal Reserve’s reference range is at 3.5-3.75%: about two and a half percentage points of difference remain, which continue to make it more advantageous to hold dollar-denominated assets. A Japanese rate hike of ordinary size would narrow that gap without closing it, and the currency market appears to have already priced this in.

The precedent weighs heavily. In May, Japanese authorities deployed roughly 11,700 billion yen — about 73.5 billion dollars — in currency support operations, according to the analysis published by OMFIF based on data from the Bank of Japan and the Federal Reserve. Interventions of that scale buy time, not direction: if the rate gap remains, the pressure returns. The same analysis notes that Japan’s dependence on foreign energy further exposes the currency to the effects of the conflict with Iran, since energy imports are paid for in dollars.

The other half of the equation is decided in Washington, and this week brought signs of cooling there. On Friday, August 14, the S&P 500 lost 13.23 points, closing at 7,785.76, the day after a record high; the Dow Jones gave up 0.2% and the Nasdaq 0.3%, as reported by Yahoo Finance. The main index nonetheless closed its third consecutive week of gains: the correction was on the surface, not in the trend.

Two data points weighed on the market. Retail sales for July, recorded by the US Census Bureau and cited by Charles Schwab, fell 0.6% from the previous month, while operators had expected a 0.2% increase. The University of Michigan’s preliminary consumer sentiment index fell in August to 51.0, from 55.2 in July. The previous week, the employment report had already signaled the loss of 23,000 jobs in July. “The retail sales figure came in much weaker than expected” (transl. from English), commented Collin Martin, head of fixed income research at the Schwab Center for Financial Research.

The point of contact between the two developments is direct: falling consumption, declining confidence and contracting employment are the ingredients that historically push a central bank toward lower rates. If the Federal Reserve were to move in that direction while the Bank of Japan moves in the opposite one, the gap would narrow on both sides and pressure on the Japanese currency would ease without the need for further public intervention. None of the sources consulted, however, indicate a decision already made: the timing of the Japanese rate hike is reported as a government stance, not a resolution, and the Federal Reserve’s calendar is not covered by the data cited.

What remains are the confirmed figures at Friday’s close: exchange rate at 159.36, Japanese rate at 1%, US range at 3.5-3.75%.

Sources: Bloomberg — Japanese government’s stance; Bloomberg — exchange rate trend; OMFIF; Yahoo Finance; Charles Schwab; BNN Bloomberg.