Yen Plunges to 38-Year Low

The Japanese yen has depreciated to its lowest level against the US dollar since 1986, surpassing 160 yen per dollar on June 26, 2024, Reuters reported. This significant decline has intensified market speculation regarding potential intervention by Japanese authorities to bolster the struggling currency.

www.reuters.com reported, This sharp depreciation follows a period of sustained weakness, fueling expectations that Tokyo may step into the currency market, as it did just last month. According to Bloomberg, Japanese officials have consistently warned against excessive volatility, signaling their readiness to act.

The weakening yen carries substantial implications for Japan's economy, directly affecting import costs for energy and raw materials. Conversely, Reuters noted that a weaker yen can provide a boost to the nation's export-oriented industries, making Japanese goods more competitive abroad.

www.reuters.com noted, Japanese Finance Minister Shunichi Suzuki has repeatedly stated that authorities are closely monitoring currency movements with a high sense of urgency. As reported by Nikkei Asia on June 25, Suzuki reiterated that they are prepared to take "decisive action" if necessary to counter speculative moves.

The primary driver behind the yen's persistent weakness is the stark interest rate differential between Japan and other major economies, particularly the United States. The Financial Times highlighted on June 24 that the Bank of Japan's ultra-loose monetary policy stands in contrast to the higher rates maintained by the U.S. Federal Reserve.

www.reuters.com reported, Market participants are now closely watching for any signs of direct intervention, which could involve the Ministry of Finance selling dollars and buying yen. Such actions aim to stabilize the currency, though their long-term effectiveness without a shift in monetary policy is often debated by economists, as noted by The Wall Street Journal.

This latest plunge underscores the ongoing challenge for Japanese policymakers, balancing the need for economic growth with concerns over rising import-driven inflation. According to analysts at Nomura, the current level of depreciation significantly increases the likelihood of another intervention in the near term.

• The yen's current depreciation to over 160 per dollar marks a return to levels not seen since July 1986, a period characterized by significant global economic shifts. Historically, Japan has intervened in currency markets multiple times, notably in 2022 and again in late April and early May 2024, when an estimated 9.8 trillion yen ($62 billion) was spent to support the currency, as reported by Bloomberg.
• Key stakeholders in Japan's currency policy include the Ministry of Finance (MoF), which is responsible for authorizing and executing currency intervention, and the Bank of Japan (BOJ), which implements monetary policy. While the BOJ conducts the actual trades on behalf of the MoF, their mandates can sometimes appear at odds, with the BOJ prioritizing price stability and the MoF focusing on currency stability, according to Reuters.
• The economic implications of a weak yen are multifaceted. While it benefits large exporters like Toyota and Sony by boosting their overseas earnings when converted back to yen, it significantly increases the cost of imported goods, including energy and food. This contributes to inflation, eroding household purchasing power and raising living costs for ordinary Japanese citizens, a concern highlighted by the Japan Times on June 20.
• The primary driver of the yen's weakness remains the substantial interest rate differential between Japan and the United States. The Bank of Japan has maintained its ultra-low interest rate policy, with its benchmark rate still near zero, while the U.S. Federal Reserve has kept its rates significantly higher to combat inflation. This yield gap makes yen-denominated assets less attractive to investors, as explained by analysts at Goldman Sachs.
• Currency intervention typically involves the Ministry of Finance instructing the Bank of Japan to sell foreign currency (usually U.S. dollars) and buy yen in the open market. This action aims to reduce the supply of yen and increase its demand, thereby strengthening its value. However, the effectiveness of such interventions can be limited if not accompanied by fundamental shifts in monetary policy or if market forces are overwhelmingly against the intervention, according to a report by the International Monetary Fund.
• International coordination on currency matters is often discussed within forums like the G7. While G7 finance ministers generally agree that currency rates should be determined by market forces, they also acknowledge that excessive volatility or disorderly movements can warrant appropriate action. Any unilateral intervention by Japan could draw scrutiny, though previous actions have largely been tolerated given the yen's rapid depreciation, as noted by officials at the U.S. Treasury Department.
• Looking ahead, market participants are closely watching for any signals from the Bank of Japan regarding future monetary policy adjustments. While the BOJ kept rates steady at its June meeting, expectations for further rate hikes or a reduction in bond purchases later in the year could provide some support for the yen. However, the timing and magnitude of such moves remain uncertain, according to a recent analysis by Mizuho Bank.
• The sustained weakness of the yen has also generated political pressure on the Japanese government. Rising living costs due to expensive imports have become a significant concern for the public, prompting calls for government action to alleviate the burden on households. This domestic pressure adds another layer of urgency for policymakers to address the currency's depreciation, as reported by NHK on June 23.