The Japanese yen is entering a decisive phase after its strongest rise in about 18 months. The continuation of its gains has become linked to the Bank of Japan’s ability to meet the expectations of the markets, which have raised the ceiling of its bets to levels that may be difficult for the bank to match, at a time when several fundamental factors are still tilting in favor of a weak currency.
The yen has risen by about 5 percent against the dollar since the beginning of the month, driven by a more stringent shift in the Bank of Japan’s speech, in addition to statements by US Treasury Secretary Scott Besent in which he called on the bank to “do the right thing” regarding monetary policy.
The buying wave was reinforced by speculation about the possibility that the Japanese Government Pension Investment Fund, which manages assets of about two trillion dollars, will return a large portion of its foreign investments to the domestic market. Last week, the yen reached 152.89 against the dollar, its strongest level in about 7 months. But this rise was based largely on expectations that the Bank of Japan may double the pace of monetary tightening, from increases approximately once every 6 months currently to raising interest rates approximately every 3 months.
High expectations
Markets are currently pricing in a path that could push Japan's interest rate above 2 percent within a year, from its current level of 1 percent. Analysts believe that this scenario raises the risk of investors being disappointed with the upcoming Bank of Japan decision. The bank may raise rates without providing strong enough signals to confirm the rapid pace of tightening that markets expect.
Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said that the Bank of Japan will find it difficult to adopt a more hawkish stance than investors' current expectations, even if it raises rates at its next meeting. He warned of the possibility of the dollar returning to about 157 yen. Pointing out that a final interest rate exceeding 2 percent appears high, and may impose pressure on the Japanese economy.
The Federal Reserve complicates the picture
The future of the yen does not depend on the Bank of Japan alone. The return of bets on the US Federal Reserve raising interest rates after data showing expanding inflationary pressures is restoring support to the dollar. Markets now largely expect a US interest rate hike, with prospects for continued increases at a quarterly pace over the next twelve months.
If the Bank of Japan and the Federal Reserve tighten monetary policy in parallel, the yield gap between US and Japanese 10-year bonds may remain near 200 basis points. This gap has been a major factor in the weakness of the yen for years. Because it makes dollar assets more attractive than their Japanese counterparts.
Japan also faces an additional factor: the high cost of energy imports. The country relies heavily on imported oil, and the rise in prices due to the war in the Middle East puts pressure on the terms of trade and increases the demand for foreign currencies to settle the import bill.
A possible return to the “interest trade”
This environment may encourage investors to rebuild “interest trade” positions, which involve borrowing in low-cost yen and using the money to buy higher-yielding assets abroad. The recent rise in the yen has prompted widespread liquidation of such positions, but the end of a large portion of the liquidation operations means - in the view of some analysts - that the way has become open to rebuild selling positions on the Japanese currency. Data from the US Commodity Futures Trading Commission showed that speculative positions on the yen turned into net buyers for the first time since February, but this shift may be temporary if expectations of a Bank of Japan tightening decline. At the same time, Japanese investors are still directing significant funds to overseas markets. Ministry of Finance data showed that they pumped 1.3 trillion yen, or about $8.4 billion, into foreign stocks during August, which is the largest monthly shift towards foreign stocks in 5 months.
Pension fund bets
On the other hand, some investors are betting that the Government Pension Investment Fund will begin to reallocate its assets in favor of Japanese stocks and bonds, after the 10-year government bond yield rose to more than 3 percent for the first time in about 3 decades. Speculation increased after the “core portfolio” topped the agenda of a recent meeting of the fund’s board of directors, and after calls from Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama for increased domestic investment.
But analysts believe that the market may overestimate the size and speed of any transformation. The fund's governance framework requires it to limit the impact of its market movements, which means that any change in asset allocation will occur gradually and over a period of months.
Koichi Sugisaki, head of macroeconomic strategies for Japan at Morgan Stanley, said that any repatriation of funds from abroad will likely be a temporary inflow, similar to exchange market interventions, and will not change the fundamental factors that may push the dollar in the future towards 167 yen.
He also believes that the pension fund does not have a strong incentive to increase its holdings of local bonds, even with their yields approaching 3 percent. Because the fund's target return is higher when accounting for nominal wage growth.
The moment of decision
Thus, the yen's gains appear to be suspended between optimistic expectations regarding the Bank of Japan's tightening, and the possibility of the return of the factors that previously pressured it. These are the yield gap, the high energy bill, and the continued outflow of Japanese capital. The challenge for the Bank of Japan will not only be to raise interest rates; But also to convince investors that the upcoming pace of tightening will be as fast as the markets have priced in. If he fails to do so, the strong rise in the yen may quickly turn into a new opportunity to rebuild “interest trade” deals and bet on the currency’s decline again.
The Chinese housing market continued to show signs of weakness during last August, with new home prices declining for the third month in a row, in an indicator that reinforces fears that the real estate sector remains one of the most prominent sources of pressure on the second largest economy in the world.
Calculations showed; Based on data from the National Bureau of Statistics, new home prices decreased by 0.1 percent during August compared to last July, which is the same percentage recorded in the previous two months. On an annual basis, prices fell 3 percent, compared to a 3.2 percent decline in July, the slowest pace of decline this year.
The slowing pace of the annual decline indicates a degree of stability, but it does not yet mean the beginning of a broad recovery. Zhang Dawei, chief analyst at the real estate agency Centaline Property, said that the year-on-year price decline has become less severe in various categories of cities, suggesting that the market may have passed the peak of pessimism, but he ruled out a rapid recovery nationwide.
The data showed a clear contrast between major cities and smaller markets. New home prices in first-tier cities rose 0.1 percent on a monthly basis, ending a series of previous declines, while second- and third-tier cities continued to record declines. Home resale prices in major cities also improved slightly; This helped real estate companies' stocks compensate for their early losses.
However, the broader picture remains weak, as real estate sales, investments and new construction starts fell sharply during the first eight months of the year.
Pressure on consumption and credit
The continuing housing crisis represents a double burden on the Chinese economy. On the one hand, the decline in real estate prices weakens the confidence of families, a large proportion of whose wealth is concentrated in housing, and on the other hand, the decline in real estate activity puts pressure on the revenues of local governments that have historically relied on land sales. The effect of this also appears in credit. Household loans, including mortgages, decreased by about 202.9 billion yuan, or about $30.2 billion, last August, after a larger decline of 460.3 billion yuan in July. These numbers reflect the continued reluctance of families to borrow, despite the measures taken by the authorities to encourage demand.
Limited support measures
Last month, Beijing launched a new set of measures aimed at rebuilding confidence in the sector, including gradually pushing developers away from the model of pre-sale of housing, which sparked buyers’ dissatisfaction after projects they paid for were halted during the sector’s crisis. The financial authorities also extended the maximum term for personal real estate loans to 40 years instead of 30 years, in an attempt to reduce monthly burdens on buyers and stimulate demand. But analysts believe that these measures may be more effective in reducing risks in the long term than in stimulating home sales quickly.
Zhang said that the market's ability to record further improvement will mainly depend on the return of buyer confidence, the emergence of real demand for housing, and the success of local governments in implementing stabilization policies.
The real estate data comes at a time when the Chinese economy has lost some momentum. Growth slowed to 4.3 percent during the second quarter, while more recent indicators indicate that China continues to rely heavily on exports and the industrial sector to compensate for weak domestic consumption and investment.
Oxford Economics believes that the real estate crisis may be more prolonged than expected. Chief Economist Sheana Yu said the foundation expects the housing stagnation to continue throughout the current five-year plan period, with residential investment not returning to growth before 2031.
The corporation lowered its forecast for the growth of the Chinese economy in 2027 to 4.3 percent, noting that the continuation of the real estate crisis will keep growth weak even with increased government investment. This scenario puts more pressure on policymakers to provide stronger support for domestic demand. Although the pace of price decline has begun to slow, the sector has not yet regained its ability to support consumption and investment.
For Beijing, the challenge is no longer limited to halting the decline in house prices, but rather rebuilding confidence among families and developers, and turning limited stability in major cities into a broader recovery that can reduce the economy’s dependence on exports and industry.
Chinese factories in August provided a new signal of the high-tech sector's ability to support the world's second-largest economy, after industrial production growth accelerated driven by demand related to artificial intelligence and advanced equipment. But the opposite picture seemed less optimistic, with consumer spending slowing, investment contraction worsening, and the real estate crisis continuing, revealing a widening gap between the strength of the supply side and weak domestic demand.
Data from the National Bureau of Statistics showed that industrial production rose 5.2 percent year-on-year in August, accelerating from 4.5 percent in July, and exceeding market expectations of 4.8 percent. The performance was particularly supported by the equipment and advanced technology industries, in reflection of the government strategy aimed at shifting more resources away from real estate and traditional industries, and towards artificial intelligence, chips, robotics and high-value manufacturing.
Poor consumption
But the strength of factories did not transfer with the same momentum to Chinese consumers, as retail sales rose only 0.4 percent year on year, slowing from 0.6 percent in July, and below expectations for a 0.8 percent increase.
The data confirms the continuation of one of the most prominent challenges facing Beijing; It is China's ability to produce and export increasing quantities of advanced goods, while not achieving a similar recovery in household spending.
Weak consumption and the real estate crisis contributed to the slowdown in GDP growth to 4.3 percent in the second quarter, which is the slowest rate in more than 3 years, and below the lower end of the target range for annual growth of between 4.5 and 5 percent. Lin Song, chief economist for the Greater China region at ING, said that unless an unexpected strong improvement appears in September, the economy's growth is likely to remain weak during the third quarter.
Oxford Economics also lowered its forecast for China's growth in 2026 to 4.6 percent, and reduced its estimates for next year to 4.3 percent from 4.6 percent previously. Chief Economist Sheana Yu attributed the adjustment to the expectation that the real estate crisis will continue for a longer period, keeping growth under pressure even with increased public investment.
Investment is declining
Investment data was more clear in expressing the state of weakness. Investment in fixed assets, which includes infrastructure, real estate and corporate projects, fell by 7.2 percent during the first eight months of the year, the largest decline since April 2020. The real estate sector was at the heart of the decline; Investment in it fell by 19.9 percent compared to the same period last year, while new home prices continued to decline, indicating that the prolonged crisis in the housing market is still far from over. The repercussions of real estate are not limited to construction activity; The decline in house prices affects household wealth and confidence, and limits their willingness to increase spending, while companies in turn hesitate to expand their investments in light of weak demand.
Artificial intelligence creates a gap
On the other hand, technology-related industries continue to provide one of the most powerful drivers of the economy. Investment in high-tech industries grew by 5.2 percent during the period from January to August, benefiting from a global boom in spending on artificial intelligence and data centers.
Lithium-ion battery production jumped 57.2 percent year on year, while industrial robot production increased 34.6 percent. The boom coincides with a strong expansion in Chinese exports of high-tech products and components related to artificial intelligence infrastructure, giving the economy an important source of growth in the face of a weak domestic market.
But at the same time, these successes reveal a growing imbalance in the structure of growth. Large investments in advanced industries have not yet translated into corresponding improvements in household incomes or job security. The urban unemployment rate rose to 5.3 percent in August from 5.2 percent in July, reinforcing concerns about the ability of industrial transformation to create jobs at enough speed and scale to support consumption.
Real estate and credit
Weakness is also evident in credit activity. Although new bank loans returned to positive territory in August, they were far below analysts' expectations after the record contraction recorded in July. The numbers indicate that the abundance of liquidity alone is not enough to stimulate activity when households remain conservative towards borrowing, and companies are reluctant to launch new investments.
During August, the economy was also exposed to the effects of severe weather conditions, after four hurricanes struck China and disrupted activity in important industrial and logistical areas on the east coast. These domestic pressures coincide with a more difficult external environment, including rising oil prices due to the Middle East conflict, and continuing high global borrowing costs.
Additional support
Fu Linghui, spokesman for the National Bureau of Statistics, said the external environment remains “complex and full of challenges,” while structural adjustment pressures persist within the economy, requiring continued efforts to stabilize the growth path. Beijing has responded so far by accelerating government bond issuance and expanding loan interest subsidies directed at small private businesses and consumers. The central bank also pledged to provide further support, without giving an explicit indication of an imminent reduction in key interest rates or the mandatory reserve ratio for banks.
But economists believe that the main problem goes beyond the cost of financing. Barclays analysts said that policymakers' reluctance to launch a more aggressive package targeting consumption may prolong the rebalancing process.
The August data thus highlight the current paradox of the Chinese economy: a clear success in building an advanced industrial base capable of competing globally, matched by internal demand that is still unable to catch up with it. While exports and artificial intelligence give Beijing room to continue to grow, a more sustainable recovery will ultimately depend on the ability of policies to restore confidence to consumers, stabilize real estate, and turn factory success into stronger incomes and spending within the economy.
