USD/JPY exchange rate appreciates to 149 yen

In the foreign exchange market, the appreciation of the yen and the depreciation of the dollar are gradually intensifying. In the Tokyo market on February 20, the yen-dollar exchange rate once reached about 149 yen per dollar, a high point since about two months in early December 2024. In addition to the expectation of additional interest rate hikes by the Bank of Japan (central bank), the factors driving the appreciation of the yen include the situation in Ukraine and the expectation of a slowdown in the pace of asset compression by the Federal Reserve (FRB) in the United States.

Hiroshi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking Corporation, pointed out that “the yen, which is considered to be less susceptible to diplomacy and Trump’s tariffs, is being bought” in response to the further appreciation of the yen on February 20.

The reason is the situation in Ukraine and the FOMC

The factors driving the appreciation of the yen in the Tokyo foreign exchange market on February 20 were two overseas factors. The first is the increasing concerns about the situation in Ukraine. On February 19, US time, US President Trump called Ukrainian President Zelensky a “dictator” on social media.

Zelensky retorted that “Trump lives in a false information space created by Russia.” The day before, senior officials from the United States and Russia met in Saudi Arabia. Due to Trump’s remarks, the high expectations for a ceasefire in the Russian-Ukrainian conflict suddenly weakened.

Another factor is the minutes of the Federal Open Market Committee (FOMC) meeting held on January 28-29, which was released by the Federal Reserve on February 19. Regarding quantitative tightening (QT) to reduce the holdings of U.S. Treasuries and other assets, it was proposed at the meeting that “a pause or slowdown should be considered.”

During the COVID-19 pandemic, the Federal Reserve purchased trillions of dollars in bonds to stabilize the market. The bond holdings on its balance sheet began to shrink after reaching a peak of about $9 trillion in 2022, and have now fallen below $7 trillion.

Daisuke Karakama, chief market economist at Mizuho Bank, pointed out that “the discussion of QT was unexpected.” The market generally believes that if the Fed stops QT, it will put downward pressure on U.S. interest rates, thereby pushing the dollar further depreciating.

Expectations of additional interest rate hikes by the Bank of Japan

In the current foreign exchange market, there is an expectation that the Bank of Japan will raise interest rates, which is a factor driving the appreciation of the yen. On February 19, Bank of Japan board member Hajime Takada said at the Miyagi Prefecture Financial and Economic Council that “if the expectations (for the economy and prices) are realized, we will enter a further adjustment phase.” The market generally interpreted this as the Bank of Japan showing a positive attitude towards monetary tightening.
In the market, expectations are growing that the Bank of Japan may raise the policy interest rate to a higher level faster than expected. In the domestic bond market, the yield on newly issued 10-year government bonds, which is a long-term interest rate indicator, reached 1.440% on February 20, a record high since November 2009. It is quite common to believe that “the narrowing of the interest rate gap between Japan and the United States is the basis for the current further appreciation of the yen and the further depreciation of the US dollar” (Ryu Shota, foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities).

Regarding the future yen exchange rate, Sony Financial Group Chief Analyst Maki Ogawa said, “There is no yen buying factor that can determine the outcome now, and the yen appreciation will be unsustainable blindly.” He believes that “even if it breaks through the 150 yen mark for a short time, it will be short-lived.” Although this is not a turning point in the yen’s appreciation trend, the market remains highly sensitive to factors that could push the yen higher.