Adverse factors "entwined", the significant interest rate cut by the Federal Reserve may not be able to change the trend of the yen bulls "peaking".

The significant rate cut by the Federal Reserve has brought a tailwind to the yen, but the many negative factors facing the yen seem to outweigh these advantages. After experiencing its worst week in nearly five months, the yen continued to be under pressure on Tuesday morning in Tokyo. Federal Reserve Chairman Powell's cautious approach to easing raises a question: even after the Fed cut interest rates by 50 basis points, will the yield differential narrow enough to support the yen? Meanwhile, Bank of Japan Governor Haruhiko Kuroda does not seem eager to raise interest rates again. So far this quarter, the yen has appreciated by 12% against the US dollar, making it the best performing among the 17 currencies tracked by Bloomberg. However, investors can easily find reasons for a rebound or temporary pause in terms of capital flows and investor positions. These four charts explain the reasons: Despite the Bank of Japan ending its negative interest rate policy, the sluggish growth of the Japanese economy and the prospect of an aging population have encouraged local fund managers and companies to invest elsewhere. While the pace of purchasing foreign bonds has slowed down this year, direct investment has offset this decline, keeping the total outflow strong at 9.42 trillion yen ($660 million). This situation is similar to Japan's trade balance. The deficit has been reduced since peaking in 2022, but after seasonal adjustments, it has remained negative for three consecutive years. Kazushige Kaida, head of foreign exchange sales at State Street Bank & Trust Company's Tokyo branch, said, "The potential trend is selling the yen. Many Japanese investors believe that excess returns cannot be obtained domestically in Japan, but can be obtained overseas." Even after the Bank of Japan started tightening policy, Japan's overall yield curve is still lower than the country's inflation rate. This is in stark contrast to other major economies like the United States (where the real yield is positive), making these markets highly attractive to Japanese funds. The Federal Reserve's large rate cut on September 18 is also seen as an effort by Powell to ensure a soft landing for the US economy, which may limit further declines in US bond yields and the appreciation of the yen. Jun Kato, chief market analyst at Tokyo Trust Asset Management, said, "As the yen's yield is negative, the yen is still susceptible to selling pressure." "Considering that the US economy is not in such a sudden deceleration state, the trend of a significant narrowing of actual interest rate differentials between the US and Japan may stop." The Bank of Japan kept its benchmark interest rate unchanged at 0.25% last Friday. Kuroda said the softening yen is easing the upside risks to inflation, giving the central bank room to consider policy. Doubts about the sustainability of the uptrend may prompt speculators to reconsider their long positions on the yen, as the yen reached its highest level since 2021 earlier this month. Japan's low interest rates relative to other countries mean that investors' long positions will incur losses unless the yen's appreciation is enough to offset the yield differential. Hideki Shibata, senior interest rate and forex strategist at Tokai Tokyo Intelligence Laboratory Co., said, "Speculators are less likely to build more yen long positions from now on." "The market has already digested a significant amount of Fed rate cuts. Pressure to buy yen may have already peaked due to the divergence in real interest rates between Japan and the US."