Yen hits 20-year low against dollar amid Japan-US policy gap

The yen hit its lowest level against the dollar in two decades on Wednesday, extending recent declines as the gap widens between Japan’s ultra-loose monetary policy and the Fed’s tightening in the United States.

Although it is traditionally considered a safe-haven currency, uncertainty fueled by Russia’s war in Ukraine did not cause the yen to strengthen.

Instead, moves by the U.S. Federal Reserve toward more aggressive policy and the shock of rising oil prices in Japan — a major importer of fossil fuels — pushed the currency lower, analysts said.

A dollar bought ¥126 in the afternoon – the lowest rate since 2002.

“The Japanese yen has been one of the weakest currencies in the world this year,” Dutch banking group ING said in a recent commentary.

“Driver of the rally was the perfect storm of a hawkish Federal Reserve, a dovish Bank of Japan (BOJ) and Japan’s negative terms-of-trade shock as a major importer of fossil fuels.”

The yen had already lost 10% of its value against the dollar in 2021 after four years of constant strengthening.

The US central bank adopted a hawkish tone as it embarked on an aggressive tightening course, pushing up US Treasury yields which strengthened the dollar against the yen.

Earlier on Wednesday, Bank of Japan Governor Haruhiko Kuroda said the bank would maintain its monetary easing policies in a bid to meet its long-held 2% inflation target.

“Given the economic and price situation, the Bank of Japan will seek to meet its inflation target of 2% … through resiliently continuing its current strong monetary easing,” he said.

Swiss bank UBS said a weaker yen would likely hurt the purchasing power of Japanese households and domestically-oriented small businesses that will face higher import costs.

“The government is offering tax supports and will most likely expand the supports. We believe that JPY buying intervention is possible if the pace of depreciation is considered too fast,” he said in a note.

“We can not completely deny the possibility that the BOJ adjusts its policy to deal with public criticism” on the depreciation of the yen, said UBS, noting that the bank under Kuroda “was quite flexible and pragmatic in the past” .

Prime Minister Fumio Kishida did not comment directly on the fall of the yen when questioned on Tuesday, but stressed the importance of exchange rate stability.

“I will refrain from commenting on the level of exchange rates, but their stability is important and I think rapid fluctuations are not desirable,” he said.

Finance Minister Shunichi Suzuki also said earlier on Wednesday that the yen’s rapid movements were “undesirable” and warned that the government was closely monitoring the currency’s movements.

“Exchange rates move on a variety of factors, not just the U.S.-Japan interest rate differential,” Suzuki said, when asked if the outlook for higher Stable US interest rates and the bank to continue Japan’s ultralow interest rate policy were accelerating the yen’s fall.

“It is important that exchange rates move in a stable manner,” he said.

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