Key moment for 1990 Yen: Breaking below the 160 level, Bank of Japan intervention window is closing

Spring 2024, the Japanese yen once again enters the spotlight in the investment market. Amid the Bank of Japan’s continued accommodative policy, the 1990 yen faces a historic moment—USD/JPY drops below 160, marking the largest depreciation of the yen since 1990. This is not just a numerical change but reflects deep contradictions between Japan’s monetary policy and the global economic landscape.

Historic Moment: First time since 1990, Yen falls below 160

Breaking below 160 in 1990 signaled that the yen’s depreciation had crossed a new threshold. In a market environment with relatively thin liquidity, the USD/JPY exchange rate steadily declined, reaching a low of 159.35. Behind this figure is a collective market disappointment with the Bank of Japan’s policy stance—at last week’s central bank meeting, policymakers chose to keep rates unchanged and did not reduce asset purchases as market expectations suggested. This “wait-and-see” attitude triggered negative sentiment among traders.

French bank Société Générale’s FX strategist Kit Juckes noted that the decline of the 1990 yen has become chaotic and disorderly, often indicating that before hitting bottom, there may be a final sharp drop. Unless Japanese policymakers take more proactive measures—whether direct intervention or raising interest rates—the upward momentum of USD/JPY may end in an excessive surge.

Loose policies struggle to deliver: Central bank keeps rates steady, market expectations unmet

The Bank of Japan faces a difficult choice. Although it has moved interest rates out of negative territory, current levels are still far from attractive enough to lure investors away from higher yields in the US and other countries. This “half-hearted” policy approach cannot effectively prevent capital outflows and the resulting yen depreciation pressure.

Chris Weston, research director at Pepperstone Group Ltd, stated that while Japanese authorities publicly deny targeting exchange rates, they are closely monitoring the pace of trend changes. The current record low of 1990 yen clearly indicates they have entered a critical moment where swift action is necessary, or risk facing a credit crisis.

Interest rate gap as the root cause: widening US-Japan interest differential adds pressure on the yen

Delving into the fundamental reason for the 1990 yen depreciation, the interest rate gap is unavoidable. The widening interest rate differential between the US and Japan makes it increasingly difficult to rely solely on intervention measures. Goldman Sachs strategists pointed out that the macroeconomic backdrop suggests the yen will further weaken, which could undermine the effectiveness of any intervention.

According to MacroMicro data tracking, the US-Japan interest rate spread continues to widen. From a purely economic rationality perspective, shifting capital from Japan to the US has become a “riskless arbitrage” opportunity. Even if the central bank intervenes, it may only temporarily delay the trend rather than fundamentally reversing market pricing logic.

Market bets escalate: hedge funds set record-high short yen positions

More concerning is the market sentiment. Data from the Commodity Futures Trading Commission shows that ahead of the Bank of Japan’s meeting, hedge funds and asset managers’ combined bets on yen weakness reached record highs. This indicates that professional investors are “voting” with real money in favor of further yen depreciation.

Meanwhile, market anxiety continues to rise, as evidenced by the soaring implied volatility of USD/JPY. Investors’ uncertainty about future exchange rate movements is increasing, further intensifying selling pressure.

Intervention challenges: difficult to reverse the trend with action alone, time is running out

Although Japanese authorities may be considering intervention, the reality is quite severe. Weston from Pepperstone believes that shorting the yen at current levels carries risks, but speculative traders likely have plans to re-establish short positions at even lower levels once government action is taken. This means any sharp rebound could quickly fall back, forming a sustained downtrend.

The breakdown of the 1990 yen ultimately reflects Japan’s structural difficulties within the global economy. Accommodative policies alone cannot reverse the situation; the widening interest rate gap and record-high market bets leave policymakers with limited room for maneuver. The window for intervention is slowly closing, and time is becoming increasingly precious.