Japanese Yen Drops To Historic Low Against US Dollar: Check Causes And Consequences (image source: iStock)
Japanese Yen: The Japanese yen depreciated to 160 against the U.S. dollar in Monday morning trading in Asia. This decline occurs amid ongoing robustness in the greenback, as expected for Federal Reserve rate cuts are postponed, according to a CNBC report.
Since the Bank of Japan terminated its negative interest rate regime in March, the yen has hovered around 150 or lower against the dollar. On Friday, the central bank maintained rates and marginally raised its inflation projections for fiscal 2024.
Japanese markets are closed on Monday due to a public holiday.
Reasons for the Slide
Rates and Momentum
Interest rates and momentum play significant roles in foreign exchange markets, both of which are currently unfavorable for the yen. The yen has experienced a steady decline for over three years, losing approximately one-third of its value since the beginning of 2021.
Yielding Currency
The yen stands as the lowest-rate, or yielding, G10 currency, making it an attractive target for investors engaged in “carry trades.” These trades involve borrowing the yen at a low cost and selling it to invest in higher-yielding currencies. This trend is particularly appealing during periods of low market volatility, fueled by the substantial rate difference between Japan and other economies.
Shift in Monetary Policy
In March, Japan’s central bank made a historic shift away from negative interest rates. However, the anticipated move lacked the promise of significant future rate hikes, thereby encouraging investors to increase their short yen positions. Yen shorts reached a decade high in April, fueled by the rates scenario and the prospect of better returns on cash held abroad.
Intervention Concerns
The yen’s depreciation against the dollar has breached the level that prompted intervention in 2022, raising concerns about potential government intervention to support the currency. Finance Minister Shunichi Suzuki’s pledge of “decisive action” against speculative moves in late March has extensive market apprehensions, with traders closely monitoring the 153 to 155 range as a potential intervention zone.
Implications
Exchange Rate Index
The yen’s real effective exchange rate index value in February hit a historic low, signaling increased purchasing power for tourist dollars and a surge in tourism. However, Japan’s domestic consumption remains weak, with households facing higher prices due to the weakened yen.
Impact Beyond Japan
The yen’s weakness extends beyond Japan’s borders, potentially undermining the competitive advantage of Chinese manufacturers and contributing to recent declines in the yuan. However, Chinese authorities maintain strict control over the currency despite external pressures.
(inputs from Agencies)
