Medicare Agent News: Rough Sailing Ahead

Tuesday, September 27, 2022

Rough Sailing Ahead

By Nicholas Jasinski | Thursday, September 22

Another Day, Another Dollar. Currency markets got more attention today than they typically do, after big moves from Japan to boost the yen. It's the first time the country has intervened to support its currency since 1998.

The U.S. dollar has appreciated some 40% against the yen since the start of 2021, including a roughly 26% rise so far this year alone. The yen had weakened to below 145 per dollar, also for the first time since 1998.

There are two major forces behind the yen's recent decline versus the dollar, relating to trade and interest rates. Japan is a major importer of energy from the rest of the world, without significant domestic oil or gas production. As the prices of the commodities have soared this year, Japan has needed to exchange more yen for dollars to purchase more expensive oil and gas, which are bought and sold using dollars.

Meanwhile, the Federal Reserve has been lifting interest rates and reducing the size of its balance sheet this year. Conversely, the Bank of Japan has held its target rate unchanged at negative 0.1% since 2016 and continues to pursue quantitative easing.

The significantly higher yields on offer in the U.S. have increased demand for dollar-denominated bonds relative to Japanese bonds. The 10-year U.S. Treasury note yields 3.71% while a 10-year government bond in Japan yields just 0.25%. It means investors who hold yen are incentivized to trade those yen for dollars to earn a higher return.

The basic rules of supply and demand have pushed the yen down in value relative to the dollar.

Today, Japan’s Ministry of Finance said it would intervene by using its foreign exchange reserves to purchase yen, increasing demand for the currency. The yen quickly popped 2% against the dollar—a huge move for currency markets.

Don't take that as the start of a long rally in the yen versus the dollar, however. Here's Thomas Mathews, senior markets economist at Capital Economics, writing today:

The key question, in our view, is whether intervention will be successful on a sustained basis. There are some serious challenges facing the country’s authorities on that front. Even at ~$1.2 trillion, their foreign exchange reserves are dwarfed by the size of the yen market. And history is not encouraging: their last efforts to prop up the yen, in early 1998, were unsuccessful: then the yen ultimately fell a further ~14% against the dollar, only reversing after the LTCM collapse in August of that year led to a spike in safe-haven demand and a Fed rate cut.

As long as the BoJ is maintaining its ultra-easy monetary policy stance and other central banks are tightening, the Japanese Ministry of Finance will be fighting an uphill battle. It may take a Fed pivot to easing or a global economic stumble that sends investors flooding into safe-haven assets to relieve the downward pressure on the yen.

Japan’s Nikkei 225 index has held up relatively well this year, down less than 6% year to date versus an 18% decline for the STOXX Europe 600 index and a 21% loss for the S&P 500. But that’s in yen terms—a U.S. investor would have lost some 24% in Japanese stocks this year when converting back to dollars.

Back in the U.S. stock market today, investors remained in a selling mood. The S&P 500 fell 0.8%, the Dow Jones Industrial Average lost 0.4%, and the Nasdaq Composite dropped 1.4%. Growth-oriented stocks were the hardest hit, as bond yields continued to drift higher. A Fed pivot would be helpful there too.