After a rapid rebound, the Japanese yen has once again fallen into a quagmire of depreciation. Since September 16th, when the US dollar to yen exchange rate hit a low of 139.582, it quickly rebounded, reaching a peak of 153.188 to date, not far from the historical high of 161.956. This has reignited market concerns about whether the yen's depreciation will break through the previous low and when it will bottom out.

The rapid depreciation has also alerted Japanese officials, who have expressed that they will closely monitor the exchange rate trends. On October 25th, Japan's foreign exchange affairs head, Jun Mimura, stated that they are maintaining a high level of vigilance over exchange rate fluctuations, including speculative ones. However, despite the yen's depreciation, the Japanese stock market has remained relatively stable. This Wednesday, the "largest IPO in Japan in six years," Tokyo Metro, successfully went public and surged, adding strength to those bullish on the Japanese stock market.

The US dollar to yen exchange rate has once again broken through 151.

This year, the yen has been in a general depreciation channel, with the US dollar to yen exchange rate once rising to 161.956. However, after peaking on July 4th, the US dollar to yen began to fall rapidly, reaching a low of 139.582, and then this trend reversed, with the yen weakening again. Currently, the US dollar to yen has risen to the 151 level, touching a high of 153.18, the highest level since the end of July. The recent sharp rise has pushed the US dollar to yen above the 200-day moving average of 151.38, and some industry insiders say this has opened the door for further yen depreciation.

Advertisement

The rapid depreciation of the yen has also attracted official attention. On October 23rd, Japanese Finance Minister Katsunobu Kato warned against currency speculation and expressed concern over the "one-sided, rapid" trend in the currency market that is driving the yen's depreciation. Kato stated, "Maintaining exchange rate stability is very important. We are closely monitoring exchange rate trends, including any speculative activities."

Nomura International analysts pointed out that if the yen further weakens after the Japanese House of Representatives election, this will not only increase the possibility of government intervention but may also prompt the Bank of Japan to hint at the earliest possible interest rate hike in December at the policy meeting on October 31st. Nomura currency strategist Yusuke Miyairi said that the yen seems to be playing the role of a pressure relief valve, alleviating all pressures faced by Japan's macroeconomy.

The last time Japan intervened to buy yen was at the end of July to support the yen, when the US dollar to yen exceeded 161, setting a 38-year high and causing a panic in the market. Although the weak yen has boosted exports, the rise in the cost of imported raw materials has hurt households and retailers, becoming a concern for policymakers.

The recent depreciation of the yen has mainly been passive. Over the past three weeks, as Federal Reserve officials have continuously released cautious signals about gradual interest rate cuts, and the probability of former US President and Republican presidential candidate Trump winning the election has continued to soar recently, the US dollar index has followed the rise in US Treasury yields. Currently, the US dollar index is maintained above 104 points, and at the end of September this year, due to the Fed's unexpected interest rate cut, the US dollar index once tested the support at 100 points. In addition, the Bank of Japan's ultra-loose monetary policy, coupled with Bank of Japan Governor Haruhiko Kuroda's hint that he is not in a hurry to raise interest rates, has also been interpreted by the market as a cause of yen weakness.

Monex foreign exchange dealer Helen Given said, "The yen is once again on a dangerous path, especially considering the very low possibility of the Bank of Japan raising interest rates at next week's meeting. Before the end of this year, it is very likely that the US dollar to yen will head towards the 155 mark."

So far in October, the yen's exchange rate against the US dollar has fallen by about 6%, potentially making it the worst-performing month since April 2022. Although all G10 currencies have fallen against the US dollar this month, the yen's decline is obviously "far ahead."In terms of interest rate spreads, on Wednesday, Japanese government bonds and U.S. Treasury bonds fell in price together, with the 40-year Japanese government bond yield briefly rising to 2.535%, the highest since 2008. However, the recent rise in Japanese government bond yields is clearly not as fast as that of U.S. Treasury yields.

Marito Ueda, head of market research at SBI Liquidity Market Co., stated that it is unlikely for U.S. Treasury yields to decline or the dollar to be sold off before the impact of the U.S. presidential election fades, which would provide strong support for the dollar.

Foreign capital floods into the Japanese stock market

The yen plummets, yet the Japanese stock market shows relative strength. The Nikkei 225 index once broke through 42,000 points this year, setting a 34-year high. Funds linked to the Japanese stock market have seen significant premiums. Despite repeated risk warnings from fund companies, market enthusiasm remains unabated.

However, in August this year, a reversal occurred. The Nikkei index suddenly turned around, and on August 5th, it plummeted by 12.4%, leading the global decline. But just as the market was worried about when the bottom of the Japanese market would be, the stock market rebounded quickly, with the Nikkei 225 index rebounding rapidly from a low of 31,156 points to 40,257 points. Although the market has been volatile recently, the Nikkei 225 index has remained around 38,000 points. As of the close on October 25th, the Nikkei 225 index reported 37,913.92 points, with a year-to-date increase of 13.3%, still performing strongly among the world's major markets.

One of Europe's largest private banks, Lombard Odier, is turning bullish on the Japanese stock market, believing that regardless of the outcome of the U.S. election, the Japanese stock market is a prime investment point. The bank's Chief Investment Officer for Asia, John Woods, said on Wednesday, "I think Japan is in a win-win situation now." He said that a victory for former U.S. President Trump would help the dollar remain stable or strengthen, which is a good sign for the Japanese stock market. On the other hand, if Vice President Harris wins, border taxes may be abolished, which would also boost the Japanese stock market. John Woods added that Lombard Odier upgraded its rating on the Japanese stock market from neutral to overweight last week.

The overall positive stock market has also given IPOs confidence. Tokyo Metro, dubbed "Japan's largest IPO in six years," caused a sensation in the Japanese stock market on its first day of listing. On October 24th, Tokyo Metro's share price soared by 47% at one point, opening at 1630 yen and reaching a high of 1768 yen, far above the IPO price of 1200 yen, with a market value once exceeding 10 trillion yen. On October 24th, Tokyo Metro closed at 1739 yen, up 42% from the issue price. This outstanding "performance" is even more eye-catching than the average increase of 34% in the stock prices of Japanese companies listed this year, adding bullish strength to the Japanese stock market. On October 25th, Tokyo Metro fell by 5.46%, closing at 1609 yen.

Senior market strategist at AllianceBernstein, Huang Senwei, also said that the Japanese stock market has been a relatively favored market for foreign capital in recent years because the depreciation of the yen has boosted the performance of Japanese export companies. In recent years, Japanese listed companies have also been committed to corporate governance reforms and improving shareholder returns, and Japan is gradually moving out of deflation.

According to statistical data released by the Ministry of Finance of Japan, as of October 19th, foreign capital has purchased a total of 21.1 trillion yen in Japanese stocks this year.

The Bank of Japan stated in its latest financial system report that the activity level of the Japanese stock market has been higher than the historical trend level this year, but there has been no obvious overheating in stock valuations. The Bank of Japan said that the price-to-earnings ratio has remained at the historical average level. The Bank of Japan added: "Considering that Japanese banks holding stocks carry a certain degree of market risk, the development of asset prices is worth paying attention to."