On Wednesday, the yen dropped to its lowest level against the dollar in twenty years, extending recent falls as the gap between Japan’s ultra-loose monetary policy and Fed tightening broadens.
According to analysts, the shock of rising oil prices in Japan and moves by the US Federal Reserve towards a more aggressive policy have pushed the yen lower.
Japan is a major importer of fossil fuels.
One dollar bought 126 yen at around 0630 GMT on Wednesday, the lowest rate since 2002.
In a recent commentary, Dutch banking group ING said “The Japanese yen has been one of the weakest currencies anywhere in the world this year.”
“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.”
In 2021, after four years of steady strengthening, the yen lost 10% of its value against the dollar.
Bank of Japan governor Haruhiko Kuroda. on Wednesday said the bank would maintain its monetary easing policies in a bid to reach its long-held two-percent inflation target.
“Given the economy and price situation, the Bank of Japan will seek to realise its 2% inflation target… by resiliently continuing its current powerful monetary easing.”
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 when asked about the yen’s fall on Tuesday, said “I will refrain from commenting on the level of exchange rates, but their stability is important and I think rapid fluctuations are undesirable.”