Shifting Forces Behind Yen Depreciation: From Jay Powell to Mrs. Watanabe

Why some experts predict the yen could weaken to 170/$

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In recent months, the driving force behind the weakening yen has shifted from Fed Chairman Jerome Powell to “Mrs. Watanabe.” The latter is the nickname given by traders to the proverbial Japanese housewife who oversees the family budget and manages its investments. And quite a shift it is.

From January 2021 through April of 2024, 94% of the yen’s fluctuations could be explained by the up and downs of the gap between the interest rates on US and Japanese 10-year government bonds. As this gap widened, money was lured from Japan into the US, by investors willing to sell yen to buy dollars.

However, beginning around April, additional factors began to overwhelm the impact of the rate gap, eventually causing it to fall substantially from 3.8% to 3.2%. And yet, instead of recovering as in the past, the yen has moved in the opposite direction. It weakened further from 153/$ to 161/$, before three days of intervention brought it back temporarily to around 156/$ (see chart above).

If the correlation between the yen rate and the rate gap were the same as it had been over the past few years,  the yen would be around 137/$ (see chart below)

Did you know … ⧉

⧉ The word "Yen" is derived from the character 圓 (en; "round") to signify the shape of a coin.

⧉ In 1949, in order to stabilize the Japanese currency, the yen exchange rate was set at 360/USD, some say to reflect the fact there are 360 degrees in a circle. 

So, something big has changed. What is it?

That brings us back to Mrs. Watanabe. Beginning in January, households started buying foreign stocks. That was the unintended effect of a new tax break to get households to buy more stocks by expanding tax breaks for those investing in Nippon Individual Savings Accounts (NISA). Japanese households notoriously have little investment in stocks and far too much in bank deposits earning almost nothing. Mrs. Watanabe didn’t buy more equities overall but shifted holdings to the tax-advantaged accounts. Moreover, rather than investing in equities at home, households devoted a huge share to overseas stocks.

Expectations that the yen will strengthen substantially when the Federal Reserve starts cutting could be overblown.

So massively did households do so that Barclays Securities recently estimated that an enormous ¥12 trillion ($74 billion) in NISA money could be sent overseas this year. Investors have to sell yen to buy those overseas shares. If Barclay’s estimate proves true, that would offset half of the entire current account surplus for the year. The latter surplus—the trade surplus in goods and services plus income from overseas investments—is the main source of net demand for yen. A new development erasing half of that demand could explain much of this year’s ratchet. Moreover, as I’ll detail below, NISA is just one of the structural factors behind the steady weakening of the yen.