Officials vowed to take action to defend the yen on Thursday, leading investors to believe that the Bank of Japan may soon come to the rescue.
However, Goldman Sachs believes that whether the central bank intervenes or not, the yen may be doomed to fall.
(the devaluation of the yen triggered speculation about the intervention of the central bank) Japanese finance ministry officials said on Thursday that the recent exchange rate trend was "extremely worrying",
Japan will take appropriate actions in the foreign exchange market.
This is the strongest warning issued by Japanese officials against the decline of the yen so far, highlighting the growing concern of Japanese policymakers about the rapid depreciation of the yen.
Bank of Japan governor Haruhiko Kuroda previously warned that the depreciation of the yen could damage the Japanese economy.
"Excessive fluctuations in exchange rate movements are undesirable," the official said. The Ministry of finance of Japan is responsible for supervising monetary policy and deciding whether to intervene in the exchange rate market.
"We will take appropriate actions when necessary, and closely communicate with the Bank of Japan and the monetary authorities of other countries." The official said.
After the above remarks, the yen regained some of its losses after the yen fell below 130 yen against the US dollar, as the Bank of Japan promised to buy unlimited bonds every day on Thursday to limit yields, and also sent a strong signal on its ultra loose position.
The market is concerned about whether Japan will intervene in the foreign exchange market to support the yen when the May Day golden week begins on Friday.
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The main reason for the recent sharp depreciation of the yen is that Japan's economic fundamentals are relatively weak compared with other developed economies, and the deviation from the expectations of the U.S. and Japan's monetary policy will further increase the interest rate gap between the yen and other currencies in the future, resulting in an increase in yen selling operations in the market.
Worryingly, there is a high probability that the Federal Reserve will further raise interest rates at its policy meeting next week, which may further weaken the yen against the US dollar, as investors are concerned about the prospect of widening US Japan interest rate differentials.
Goldman Sachs: the yen may not escape the fate of decline
In response to the potential intervention of the Bank of Japan, Goldman Sachs said that as long as the yield of U.S. Treasury bonds continues to rise and the Bank of Japan maintains control over the main yield curve, the yen will continue to be under pressure because the interest rate spread is beneficial to the dollar.
"We find that if there is no change in the expectation of the control of the yield curve, the intervention of the Bank of Japan will be difficult to promote the continuous appreciation of the yen exchange rate.
Given that the yield risk is still biased upward, the effect of foreign exchange intervention may not be satisfactory. " Karen reichgott Fishman, a strategist at Goldman Sachs in New York, wrote in a report.
Fishman believes that according to the past actions of the Bank of Japan, if the yen continues to depreciate, the possibility of central bank intervention is "high". Previous interventions mostly occurred when the exchange rate of the US dollar against the Japanese yen was between 127-130 yen.
Goldman Sachs said that if the Bank of Japan revalued its control policy on the yield curve and the interest rate gap between Japan and the United States narrowed by 40-45 basis points, the yen could rise as much as 3%.
However, the bank also expects that the real interest rate and fair value will not converge immediately, which means that the impetus to the exchange rate may be small.