TOKYO -- The yen's continued slide is spurring speculators to sell Japanese government bonds in anticipation of a retreat by the Bank of Japan from its easy monetary policy, fueling a self-perpetuating loop as the central bank continues to defend its ultralow interest rate target.
The currency has weakened beyond 136 to the dollar for the first time in 24 years as selling gained momentum after the BOJ decided last week to stay the course on easing. The central bank faces mounting pressure to move away from an ultraloose monetary policy that has fueled the yen's dramatic fall.
JPMorgan on Tuesday revised its year-end forecast for the yen from 132 to 140 against the dollar. Strategist Benjamin Shatil suggested that the Japanese currency could weaken further, given the strong correlation with U.S.-Japan yield spreads. The gap between two-year U.S. Treasury and JGB yields has widened to about 3.3 percentage points and recently reached a 15-year high.
A weaker yen makes imports more expensive, leading to higher consumer prices and putting more pressure on the BOJ to tighten monetary policy to hold down inflation. Expecting such a pivot, investors are increasingly selling Japanese government bonds before prices fall, a trend that is itself driving interest rates upward.
Yet BOJ Gov. Haruhiko Kuroda indicated last week that he has no intention of changing his stance . The central bank sent a similar signal by widening the scope of its fixed-rate purchase options, in which it offers to buy an unlimited quantity of government debt at a set interest rate to keep yields below its ceiling of about 0.25%.
The central bank's holdings of new 10-year JGBs exceeded 7 trillion yen ($52 billion) as of Monday, according to data released Wednesday. The tally nearly doubled from 10 days earlier, leaving the BOJ with 88% of all such debt issued so far.
When the central bank holds rates down, the yen carry trade -- borrowing in the low-yielding yen to buy other currencies with higher yields -- gains steam, encouraging further depreciation. The Swiss central bank's recent decision to raise interest rates may add to the momentum by making the Swiss franc, another popular carry trade target, a less appealing option.
BOJ data on inter-office transfers, or money sent abroad by Japanese branches of foreign banks, is used to estimate the scale of the yen carry trade. This figure came to 9 trillion yen in April, higher than at the end of 2021. While it is still less than half the 23 trillion yen seen in February 2007, before the global financial crisis, there remains room for the carry trade to ramp up further.
A strengthening yen, on the other hand, typically spurs the speculators involved in these trades to rapidly unwind their positions -- buying yen and selling their high-yielding currency -- due to the risk of taking a hit to profits from unfavorable exchange rates.
The Japanese currency "could appreciate by around 5 or 10 yen," said Yuji Saito, chief of foreign exchange at Credit Agricole.