The yen, the third most-traded currency globally, is wallowing around 24-year lows against the dollar.
The Japanese currency fell over 0.5% to 135.835 per dollar yesterday, continuing to weaken after the Bank of Japan (BoJ) on Friday dashed any mild expectations of a change in policy and renewed its commitment to ultra-easy monetary settings.
The BoJ has bucked a wave of tightening that included the Federal Reserve, the Bank of England and even a shock half-point hike from the Swiss National Bank.
It also resisted attacks from bond market speculators testing the monetary authority’s commitment to its 25 basis point tolerance band around the zero percent target for the 10-year Japanese government bond yield.
By contrast, the Fed has followed a 75 basis-point rate hike by stating in its twice-yearly monetary policy report to Congress on Friday its “unconditional” commitment to fighting inflation, despite rising risks of recession.
The biggest reason for the yen’s decades-low weakness is the move toward higher interest rates in the US while Japan’s remain ultra-low. That makes dollar-denominated assets more attractive for investors seeking higher returns.
Other factors include the strength of the US economy and its labour market, while Japan continues to lag behind its peers to bring its economy back to its pre-pandemic size.
Japan’s trade balance staying in the red is also likely feeding into the weaker yen.
BoJ governor Haruhiko Kuroda keeps saying it’s too early to cut back monetary easing and raise rates in Japan, where inflation remains relatively muted.
The yen has long been the currency of choice for investors undertaking carry trades, which involve borrowing in a low-yielding currency like the yen to invest in higher yielding counterparts like US, or Canadian dollars.
A strategy of borrowing in yen and investing in an equal basket of US, Australian and Canadian dollars would have yielded more than 13% so far in 2022, according to Refinitiv data.
But any further volatility and weakness could undermine its appeal as a funding currency.
Japan needs a marked improvement in its growth prospects as the country reopens its borders post-Covid to boost its currency. Higher inflation could also alter the BoJ’s dovish stance.
In a wider sense, the yen’s fall to 24-year lows has repercussions for the domestic economy as yen-based import prices are surging at a record annual pace, heaping pressure on household balance sheets.
On the other hand, a cheaper yen helps exporters including car-making giant Toyota Motor Corp when they repatriate profits made overseas. It also makes Japan a more affordable travel destination - outside of pandemic times — for foreigners, bringing tourist cash for the hospitality sector and regional economies.
The yen’s decline also boosts the attractiveness of its stock market among foreign investors who consider it undervalued versus European and US markets.
Japanese stocks have outperformed rivals in 2022, although they are still down as investors globally dump riskier assets.
However, Japanese Prime Minister Fumio Kishida said on Tuesday the central bank should maintain its ultra-loose monetary policy, brushing aside opposition calls that the policy be tweaked to target Japan’s rising cost of living.
So far the fallout from the weakening yen has been minimal for broader financial markets, but that could change if the selloff accelerates.
A weaker yen can both benefit and harm the economy, businesses and consumers. The steepness of its slide, however, has raised questions about how tenable the BoJ’s policy is and the possibility of government intervention in currency markets.