What is the reason behind the 166 point sharp drop in the Japanese yen

The Japanese yen fell to its lowest level against the US dollar in nearly three months, reigniting concerns that Japanese officials may take measures to support the yen if it continues to depreciate. During Wednesday's trading, the yen plummeted by 1.4% against the dollar, reaching 153.19 yen per US dollar, and closed at its lowest level since the end of July. As of the close on Wednesday, the US dollar/yen surged by 166 points, a 1.1% increase, to 152.67.

The yen's decline led the US dollar/yen to break through the key 200-day moving average of 151.38, which analysts say opens the door for further appreciation of the currency pair.

The dollar strengthened broadly as the Federal Reserve signaled caution about cutting interest rates, leading to a significant rise in US Treasury yields, and the yen fell as a result. Speculation that the next US administration might pursue more inflationary policies after the presidential election also boosted the dollar.

Monex currency trader Helen Given said, "The yen is once again on a dangerous path, especially considering the very low likelihood of the Bank of Japan raising interest rates at its meeting next week."

Advertisement

By the end of this year, the yen is very likely to retreat towards the level of 155 yen per US dollar.

Bank of Japan Governor Kazuo Ueda hinted that more rate hikes are on the way. He said in Washington on Wednesday that determining the correct scale and timing for further normalization of interest rates "keeps me up all night."

Yukio Ishizuki, a senior currency strategist at Daiwa Securities in Tokyo, said, "Given the current momentum, the yen may weaken further, and the dollar may strengthen further. If the yen continues to weaken, authorities may step in to curb it."For Nomura International Plc, if the Japanese yen weakens further after the elections this weekend, this could not only increase the likelihood of intervention but also prompt the Bank of Japan to hint at a possible interest rate hike as early as December in its policy meeting next week.

Nomura currency strategist Yusuke Miyairi said: "The yen seems to be acting as a pressure relief valve at the moment, alleviating various pressures on Japan's macroeconomy."

On October 17, major Japanese media predicted that the ruling Liberal Democratic Party (LDP) might lose its absolute majority in the House of Representatives for the first time since 2009 in this month's election. If this happens, the LDP would need the help of its governing partners to maintain control over the House of Representatives.

Marito Ueda, head of market research at SBI Liquidity Markets Inc., said that the yield on long-term U.S. Treasury bonds has remained high, with the last time such a situation occurred being in July when the USD/JPY was at a high of around 161.

So far in October, the yen has fallen about 6% against the U.S. dollar, which could be the worst month since April 2022. This month, all G10 currencies have fallen against the U.S. dollar as traders prepare for the U.S. midterm elections on November 5th, and the pace at which the Federal Reserve eases monetary policy is expected to be slower than previously anticipated.