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Panic mode in Japan as the USD/JPY surges as Nikkei 225, Topix slip

on Oct 26, 2023
  • The USD/JPY pair has been in a strong upward trend in the past few months.
  • Japanese stock indices like Nikkei 225 and Topix index have pulled back.
  • There are concerns about the Bank of Japan’s interventions.

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Investors and policymakers in Japan are getting wary as the Nikkei 225, Topix, and the Japanese yen slip. The USD/JPY exchange rate jumped to 150.75 on Thursday, the highest level since October last year.

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Similarly, the GBP/JPY was trading at 182.50 while the EUR/JPY pair was stuck at 158.60. All these pairs have jumped by more than 15% from the lowest level this year. They have all soared by more than 38% from the pandemic low as the Japanese get more valueless.

Japan stocks, which surged earlier this year, have also suffered a harsh reversal in the past few weeks. The Topix index retreated to ¥2,200 on Thursday, down by almost 9% from the highest point this year. Similarly, the widely followed Nikkei 225 index has barreled down to ¥30,600 from the YTD high of ¥33,796.

A sense of panic is spreading in Japan where the Japan Government Bonds have entered a major sell-off. The yield of the 10-year JGB has spiked to 0.87%, the highest level since 2013. This rally accelerated after the Bank of Japan (BoJ) tweaked its yield curve control.

Japan’s government bonds sell-off has coincided with that of other countries. In the United States, the yield of the 10-year Treasuries jumped to 4.96% while the 30-year spiked to 5.12%. The same is happening in countries like Australia and the UK.

Japan’s low interest rates

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The challenge for Japan is that the collapse of the bond market, stocks, and the Japanese yen is that its interest rates remain at historic lows. Unlike other central banks, the BoJ has maintained negative interest rates in the past few years. Analysts believe that the bank will end negative rates in 2024.

The BoJ has now turned to regular monetary policy interventions in a bid to reduce the damage in the bond market. On Tuesday, the bank made the fifth unscheduled intervention in the bond market. Also, the bank has increased the purchase amounts of regular operations and loans. 

It is still unclear what the BoJ will do to save the plummeting Japanese yen. One measure would be to hike rates, but it is unclear whether that one will boost the currency. Another strategy would be forex interventions to support the currency.

A forex intervention would involve tapping its foreign dollar reserves. Indeed, the most recent data shows that the Bank of Japan has been reducing its holdings of US Treasuries. The bank now holds over $1.1 trillion in US Treasuries.

Meanwhile, Japanese equities have pulled back as investors worry about an imminent financial crisis. Also, the Nikkei 225 and Topix indices have retreated as investors focus on profit-taking. 

Worse, technically speaking, the Nikkei 225 index has formed a double-top pattern, pointing to more downside in the coming months. It has also entered the markdown of the Wyckoff method.

Nikkei 225

Nikkei 225 chart by TradingView

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