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.
Frequently Asked Questions (FAQs) about Japanese Yen Depreciation
Why has the Japanese yen hit a 20-year low against the US dollar?
What does it mean that the Bank of Japan maintains a loose monetary policy?
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.
More about Japanese Yen Depreciation
- Bank of Japan Monetary Policy
- Understanding the Yen Carry Trade
- Impact of Inflation on the Japanese Economy
- Role of the Federal Reserve in Global Economy