October Marked by Notable Decline in Japanese Yen... 6.5% Drop Over the Month

Last month, the value of the Japanese yen plunged by a staggering 6.5% against the US dollar. This was due to the dollar's strength as expectations for a US interest rate cut receded, combined with yen selling pressure stemming from political developments such as the results of the Japanese House of Representatives election.

According to the Nihon Keizai Shimbun on the 1st, as of 5 p.m. on the 31st of last month, the dollar-yen exchange rate stood at 152.24 yen, up 9.87 yen from 142.37 yen at the end of September. This means the value of the yen against the dollar fell by that amount.

The monthly increase of 9.87 yen was the largest since May 1989. In terms of the rate of decline, it recorded a significant 6.5%, marking the biggest drop since April 2022 (-6.9%), shortly after the US Federal Reserve (Fed) began its interest rate hike cycle to curb inflation. The Nihon Keizai Shimbun reported, "A historic momentum was confirmed in the October foreign exchange market," noting that it reflected awareness of the political situations in both the US and Japan.

Earlier, at the end of September, when Shigeru Ishiba, who was viewed positively regarding additional rate hikes by the Bank of Japan (BOJ), won the Liberal Democratic Party (LDP) presidential election, the yen's value rose to the high 141 yen range against the dollar in the foreign exchange market. However, immediately after taking office, Prime Minister Ishiba stated, "Personally, I do not think the current environment calls for additional rate hikes," and the yen's value began to fall again.

Moreover, political uncertainty in Japan further fueled yen selling. After the ruling LDP failed to secure a majority in the House of Representatives election on the 27th of last month, the yen's value dropped to its lowest level in three months, with forecasts emerging that it could reach 155 yen per dollar.

Kazushige Gaita, Deputy Head at State Street Bank, pointed out, "Concerns over fiscal expansion are growing, and amid political turmoil, the BOJ is thought to find it difficult to proceed with rate hikes, which has become a factor."

Meanwhile, assessments suggest that the authorities had limited room to intervene in the currency market. Daisaku Uedo, strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "With important elections upcoming in both Japan and the US, currency intervention would have been difficult." This outlook supported the yen selling trend.

On the other hand, the dollar continues to strengthen ahead of the US presidential election. The Dollar Index, which measures the dollar's value against six major currencies, briefly surpassed 104.6 on the 29th of last month, reaching levels last seen at the end of July. It currently stands at 103.89. Daiki Aiki, Chief Investment Officer at UBS SuMi Trust Wealth Management, explained, "Concerns that tariff increases advocated by former President Donald Trump, the Republican presidential candidate, could accelerate inflation again and delay the Fed's rate cut pace have also contributed to the dollar's strength."

With the US presidential election on November 5th fast approaching, there are predictions that if former President Trump wins and the Republican Party controls both the House and Senate, the current trend of yen depreciation will accelerate further. Aji Zeiga, Chief Market Strategist at Aozora Bank, forecasted, "If the exchange rate surpasses 155 yen per dollar, concerns over currency intervention will also increase."