The yen hit its lowest level against the dollar in two decades on Wednesday, extending recent falls as the gap widens between Japan’s ultraloose monetary policy and Fed tightening in the United States.
Despite being traditionally considered a safe-haven currency, uncertainty fueled by Russia’s war in Ukraine has not caused the yen to strengthen.
Instead, moves by the U.S. Federal Reserve towards a more aggressive policy and the shock of rising oil prices in Japan — a major importer of fossil fuels — have pushed the currency lower, analysts say.
“The Japanese yen has been one of the weakest currencies anywhere in the world this year,” Dutch banking group ING said in a recent commentary.
“Driving the rally has been 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 fossil fuel importer.”
The yen had already lost 10% of its value against the dollar in 2021 after four years of steady strengthening.
The U.S. central bank has taken a hawkish tone as it embarks on an aggressive tightening path, pushing up American Treasury yields which have strengthened the dollar against the yen.
Earlier on Wednesday, Bank of Japan Gov. Haruhiko Kuroda said the bank would maintain its monetary easing policies in a bid to reach its long-held 2% inflation target.
“Given the economy and price situation, the Bank of Japan will seek to realize its 2% inflation target … by resiliently continuing its current powerful monetary easing,” he said.
Swiss Bank UBS said a weaker yen would likely hit Japanese households’ purchasing power and domestic-oriented small businesses who will face higher import costs.
“The government is offering fiscal supports and most likely will expand the supports. We think the JPY purchase intervention is possible if the pace of depreciation is regarded as too fast,” it said in a note.
“We cannot completely deny the possibility of the BOJ adjusting policy to cope with public criticism” on the yen’s depreciation, UBS added, noting that the bank under Kuroda “has been quite flexible and pragmatic in the past.”
Prime Minister Fumio Kishida did not comment directly on the yen’s fall when asked on Tuesday, but emphasized the importance of stability in foreign exchange rates.
“I will refrain from commenting on the level of exchange rates, but their stability is important and I think rapid fluctuations are undesirable,” he said.
Finance Minister Shunichi Suzuki also said earlier Wednesday that rapid moves in the yen were “undesirable,” and warned that the government was watching currency moves closely.
“Currency rates move on various factors, not just on the interest rate gap between the United States and Japan,” Suzuki told parliament, when asked whether prospects of steady U.S. interest rate hikes and the Bank of Japan’s continuing its ultralow interest rate policy were accelerating yen falls.