USD/JPY: Will a “repeat of last year” happen?

■ The USD/JPY exchange rate trend on August 1 suggests the possibility of a sharp decline similar to last year's. 

■ Due to differences from last year, such as actions by the Bank of Japan and speculative funds, the chance of a repeat is considered low. 

    The July U.S. employment data released on August 1st sparked caution in financial markets. As noted in the August 5th edition of PRESTIA Insight*1, the significant downward revision of non-farm payrolls for May and June by a total of 258,000 fueled worries that the U.S. economic slowdown is deeper than initially expected. In a context of a weakening dollar, the USD/JPY exchange rate dropped from the low 150-yen range to the high 147-yen range as of August 1. 
 

    Moreover, some foreign exchange traders voiced concerns about a repeat of last year's trend. Last year, U.S. employment data released on August 2 showed the unemployment rate dropping to 4.3%, pushing the "Sahm's Rule" recession indicator above 0.50% and raising fears of a U.S. recession. The USD/JPY rate fell from the upper 149-yen range to the upper 141-yen range between August 2 and the weekend, with the decline widening. Currently, the likelihood of a similar trend to last year seems low. Besides whether the U.S. has triggered the "Sahm Rule,' two differences stand out from the past: (1) the Bank of Japan's stance on further interest rate hikes, and (2) trends in speculative fund positions. 

(1) The sharp drop in USD/JPY last year was also influenced by the Bank of Japan's monetary policy meeting on July 30 and 31 (the "BOJ meeting"). The Bank raised interest rates to 0.25%, and during President Ueda's press conference, market participants anticipated additional hikes before the end of 2024. Conversely, this year's July meeting maintained the policy rate at 0.50%, with President Ueda being cautious about further increases, which weakened the yen. 

(2) Data from the U.S. Commodity Futures Trading Commission (CFTC), reflecting speculative trading patterns, showed the non-commercial sector's net yen position as "a net sell of about 73,000 contracts" when released on August 2 last year. The ongoing cover of yen carry trades, which peaked at 161.99 yen on July 3, contributed to a sharp decline of the dollar against the yen. In contrast, as of August 1 this year, the net position was "a net buy of around 89,000 contracts." If speculative traders begin unwinding their positions, a dollar rise against the yen could occur. 
 
 
    However, these factors mainly relate to Japan, and market fluctuations driven by the U.S. remain possible. Regarding the U.S. economic slowdown, we will closely monitor economic data until the Federal Open Market Committee (FOMC) meeting in September. Additionally, a new factor to watch is the appointment of new members to the Federal Reserve (FRB) board, which could lead to further dollar depreciation.