Japanese yen hits 34-year low as dollar reigns supreme

The Japanese yen fell to its lowest level against the dollar since 1990 after the Bank of Japan (BoJ) recently ended a long era of negative interest rates. The move did not have much of an impact on the value of Japanese government bond yields, as the gap between them and US bond yields widens. This development may depend on the BoJ’s monetary policy and, in particular, how its representatives react to possible further currency depreciation or rising inflation in the country.

USD/JPY’s historic value is underpinned by the dollar’s strengthening since the beginning of this month. Despite Fed Governor Christopher Waller’s comments at a press conference on Wednesday about a possible delay in interest rate cuts dampening investor expectations, the market remains optimistic about the June deadline. The move, which could lead to a fall in government bond yields outside of Japan, should help strengthen the yen. After their meeting on Wednesday, Japanese monetary officials signaled a willingness to intervene if necessary and could consider monetary or other measures to stabilize the currency. Such words were last heard in 2022, when Japan intervened three times in the currency market to prevent the yen from falling further.

The Japanese yen steadied after losses and the USD/JPY currency pair settled near its 34-year high ahead of expected US inflation data and the US Federal Reserve’s next possible monetary policy move. Onshore Asian currencies along with the Indian rupee also lost during the week as traders bet heavily on the dollar, which is their “safe haven” right now. Other Asian currencies remained steady, with the People’s Bank of China intervening to strengthen the yuan by setting a stronger-than-expected mid-rate.

In the middle of the month, the BoJ ended the eight-year period of negative interest rates that was part of its unorthodox monetary policy and focused on short-term interest rates. The target rate was set at a range of 0% to 0.1%, with the 0.1% interest rate expected to apply mainly to central bank deposits. The decision marks the first rate hike in 17 years, following a rise in the rate of inflation after months of sharp decline. This signals a departure from monetary policy, which aimed to stimulate economic growth through cheap loans.

Negative interest rates in Japan stem from the central bank’s efforts to fight deflation and stimulate consumer price growth. While the policy has shown some results in the form of an improved economy, a weaker yen encourages Japanese firms to sell more goods abroad, which can make imports more expensive for households and cause prices and inflation to rise.

The Easter holidays in many markets contributed to uncertainty, which also contributed to the strengthening of the yen, as investors may have hesitated to hold short positions. Analysts at both Citi and UBS see limited potential for further USD/JPY gains, with factors such as rising Japanese government bond yields and Fed interest rate cuts playing into this, which in turn could weaken the greenback. The prevailing assumption is that this currency pair will mainly trend downwards in the second half of the year.

Source: Investing.com*

David Matulay, InvestingFox

* Past performance does not guarantee future results.

Resources:

https://www.investing.com/news/economy/dollar-steadies-yen-teeters-ahead-of-key-us-inflation-data-3354209

https://www.investing.com/news/forex-news/asia-fx-steadies-ahead-of-more-fed-cues-usdjpy-on-intervention-watch-3356100

https://www.reuters.com/markets/asia/japan-poised-end-negative-rates-closing-era-radical-policy-2024-03-18/

https://www.investing.com/news/forex-news/yen-weakens-against-the-dollar-as-fx-expert-warns-boj-could-intervene-near-155-3355253

https://www.investing.com/news/economy/dollar-firm-after-fed-comments-yen-under-close-watch-3356033