Yen selloff weighs on world’s third largest economy

The yen is steadfastly sticking with its long losing streak as the Bank of Japan has bucked a wave of tightening by most central banks of developed economies to fight inflation.Japan likely conducted its biggest ever currency intervention to prop up the yen late Friday.The size of the suspected market action is estimated to be as much as ¥5.5tn ($36.8bn), according to a basic calculation using the BoJ’s forecast for the change in its current account and the Central Tanshi projection for the balance assuming no intervention.But the currency weakened on Monday and traded 0.9% weaker at around 149 per dollar. On Friday, the yen soared the most against the greenback since March 2020 amid reports authorities were intervening.When propping up the yen, the dollars come from Japan’s foreign currency reserves. At the end of August Japan had $1.17tn – more than it had at the time of the April 1998 intervention. That’s a ratio of 2.4 times the daily value of the currency market in Tokyo, compared with the 1.4 times buffer it had last time, according to a Bloomberg report. However, a unilateral move is still seen as unlikely to succeed without US support.While intervention is a clear way to tell speculators you won’t allow the currency to go into free fall, it’s only going to be a temporary fix unless economic fundamentals driving the trend are also addressed. In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up the currency.The yen’s sell-off is hurting the world’s third-largest economy by driving already surging import bills and challenges the BoJ’s commitment to ultra-low rates.The central bank meets for a two-day rate meeting ending on Friday, when it is widely expected to maintain ultra-loose monetary policy.With inflation relatively modest and the economy unable to move into a faster gear, the central bank is wary of raising rates and risk triggering a recession.Finance Minister Shunichi Suzuki has repeated that excessive currency moves were undesirable.In fact, the yen’s decades-low weakness is pitted against the move toward higher interest rates in the US, while Japan’s remain ultralow. 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. 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 carmaking giant Toyota 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 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 the 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 the yen’s enduring volatility and weakness could undermine its appeal as a funding currency.