The yen has fallen to more than two-decade lows against the dollar, owing to Japan’s differing views on inflation from its global peers.
A weaker yen can help or hurt the economy, businesses, and consumers. The severity of its decline, however, has raised concerns about the BOJ’s policy and the possibility of government intervention in currency markets.
The main reason is the rise in interest rates in the United States, while Japan’s remain extremely low. As a result, dollar-denominated assets are more appealing to investors seeking higher returns. The yield on 10-year notes has risen above 3%, the highest in years, as traders continue to expect the Federal Reserve to hike interest rates aggressively.
Other factors include the strength of the US economy and labour market, while Japan continues to lag behind its peers in resuming pre-pandemic economic growth. Japan’s trade deficit is also likely contributing to the yen’s depreciation.
In April, Japan’s benchmark inflation rate rose 2.1 percent, exceeding the BOJ’s target of 2 percent. However, Kuroda has stated that it is not yet expected to remain above the target in a stable and sustainable manner, particularly in the absence of significant wage increases.
The yield curve is normally determined by market forces. The BOJ takes a more active role.
It aims to keep 10-year government bond yields around 0 percent with a quarter of a percentage point, or 25 basis points, of wiggle room either side through yield curve control, which was implemented in 2016 as part of its effort to flood the economy with cheap money in order to revive growth.
In April, the Bank of Japan decided to buy as many bonds as needed each business day to maintain the 10-year debt yield ceiling. This demonstrated that bond yields in Japan will remain low even as they rise in the United States.
If the BOJ even hinted at reducing asset purchases or changing its yield curve control, market volatility would likely increase and Japanese stocks would suffer.
Japanese government bonds are likely to experience a sell-off, adding to global borrowing costs. The yen would most likely rise so sharply that it would agitate foreign-exchange markets and harm any traders using it to fund so-called carry trades, as well as multinationals and banks with significant unhedged currency exposure.
Shunichi Suzuki, Japan’s Finance Minister, has avoided even mentioning the possibility of direct intervention in the currency market.
Any unilateral moves by Japan this time would almost certainly elicit a response from the US. Nonetheless, senior Japanese officials took the unusual step of issuing a written statement on June 10 to express their concern about the yen’s sudden weakness, pledging to take action if necessary but not specifying what that action would be.
Former Prime Minister Shinzo Abe’s introduction of a weaker yen in the last decade was widely applauded by the business community. When exporters, such as Toyota Motor Corp., repatriate profits earned abroad, a weaker yen helps. It also makes Japan a more affordable travel destination for foreigners outside of pandemic times, bringing tourist dollars to the hospitality industry and regional economies.
Commodity and other goods prices are rising at the fastest rate in decades, squeezing profits at import-dependent businesses, while everyone is feeling the pinch from higher energy prices. Consumers are feeling the pinch as the cost of imported food and other daily necessities rises.
While Japan gradually reopens its borders to international visitors, the economic benefits will be limited for the time being. With the central bank unlikely to budge, Prime Minister Fumio Kishida enacted a slew of relief measures, including increased fuel subsidies, to cushion the blow for consumers and businesses.
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