Thursday, September 28, 2023

Japanese Yen Plunges to Lowest Level in Two Decades Versus US Dollar; Bank of Japan Preserves Expansive Stance Amid Inflationary Tensions

Over the past month, the Japanese yen has depreciated more than 1% relative to the US dollar. This trend culminated on Tuesday when the yen fell to its lowest value against the dollar in more than 20 years, a consequence of the Bank of Japan’s decision to maintain its notably relaxed monetary policy amidst escalating inflation concerns and a weakening currency.

Historic Slump for Yen as BOJ Upholds Liberal Monetary Approach

The yen depreciated beyond 143 per dollar on Tuesday, sliding more than 5 yen since Friday when the Bank of Japan (BOJ) signaled its intention to let long-term yields ascend to 1% from 0.5%. The BOJ held its prime interest rate at -0.1% and explained the 1% ceiling on 10-year bond yields as a flexible guideline rather than a solid objective.

USD/JPY on August 2, 2023 at 8:53 a.m. Eastern Time.

Analysts had hypothesized that the BOJ would initiate policy normalization to tackle soaring prices, but it attributed wage-driven, not cost-push inflation as the primary determinant of any adjustments. This letdown prompted currency traders to sell off the yen vigorously, negating an initial 2% surge on Friday.

Kazuo Ueda, the BOJ governor, hinted that the central bank could begin to normalize its monetary policy if it grows confident that inflation will accelerate next year. Nonetheless, Ueda also noted that current core inflation still lingers below 2% and the BOJ anticipates price hikes to decelerate by year-end.

The growing yield difference between Japan and the US reduces the appeal of the “yen carry trade”, where investors borrow in yen at low rates to invest in higher-yielding US assets. When carry trades unwind, dollars are repaid, strengthening the yen. Semi-annual statistics against the US dollar indicate that the yen has appreciated more than 11%.

“All these markets are interconnected through global liquidity flows. Individuals borrow in yen to acquire dollars, the dollars idle around seeking a purpose, and people consider investing in treasuries or companies like Apple,” stated Simon Edelsten, the global equities fund manager at Artemis, to Reuters on July 27.

Currently, bond market volatility implies that yields will persist at high levels. The standard 10-year Japanese government bond yield increased to 0.6%, only up 0.15 points since Thursday. Markets anticipate additional BOJ intervention if yields surge too rapidly. The Federal Reserve has backed initiatives to supply US dollars to Japan in a crisis following the establishment of swap lines last year. However, it remains uncertain whether dollar strength or yen weakness will prevail.

We’d love to hear your views on the yen’s recent trajectory and the BOJ’s steadfast approach. Please share your insights and perspectives on this matter in the comments section below.

Frequently Asked Questions (FAQs) about Japanese Yen Depreciation

Why has the Japanese yen hit a 20-year low against the US dollar?

The Japanese yen has depreciated due to the Bank of Japan’s decision to maintain its loose monetary policy despite mounting inflation pressures and a depreciating currency. Other factors like global market conditions and investor sentiment towards the yen can also influence its value.

What does it mean that the Bank of Japan maintains a loose monetary policy?

A loose or expansive monetary policy means the central bank is keeping interest rates low and implementing other measures to stimulate the economy. In this case, the Bank of Japan has kept its key interest rate at -0.1% and allowed long-term yields to rise to 1%.

How does the yen’s depreciation affect the “yen carry trade”?

The widening yield spread between Japan and the US reduces the incentives for the “yen carry trade”, where investors borrow in yen at low rates to invest in higher-yielding US assets. As these carry trades unwind, dollars are repaid, leading to a strengthening of the yen.

What is the Bank of Japan’s outlook for inflation?

BOJ governor Kazuo Ueda has indicated that if the Bank becomes confident that inflation will pick up next year, it may begin to normalize its monetary policy. However, he also mentioned that for now, underlying inflation remains below 2% and the Bank’s outlook is for price increases to slow toward the end of the year.

What is the role of the Federal Reserve in this situation?

The Federal Reserve has supported measures to provide U.S. dollars to Japan in a crisis after setting up swap lines last year. The Fed’s actions can help stabilize the currency market and provide liquidity during periods of market stress.

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SarahTokyo August 3, 2023 - 2:40 am

Living in Japan, I can tell the prices are going up… Doesn’t look good for us

YenFan August 3, 2023 - 7:17 am

i still believe in yen… tough times don’t last, tough currencies do! remember the 90s, guys?

MikeDavis August 3, 2023 - 9:08 am

cant belive how the yen is plunging! Does BOJ even care about inflation?! smh…

EconBuff August 3, 2023 - 6:37 pm

well, it’s about time they let the long term yields rise, but could be too late now. interesting times ahead folks!

DollarKing August 3, 2023 - 6:54 pm

USD ruling! yen’s misery, dollar’s joy, that’s how the game is played people.

Jenny_12 August 3, 2023 - 9:39 pm

Seems like BOJ is playing with fire, dont they see the inflationary pressures?


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