The yen has plunged to a new 24-year low against the dollar as investors brace for higher United States rates.
One dollar was worth more than 140 yen for the first time since 1998 in European afternoon deals on Thursday, as the greenback also strengthened against other currencies, boosted by the ever-widening gap between the yields on US and Japanese government debt.
While this makes imported goods more expensive in Japan, a weaker yen can also raise profits for Japanese companies selling products abroad, including major companies such as Toyota and Nintendo.
The yen has been falling against the dollar from around 115 in March, prompting analysts to point to the possibility of government intervention.
Veteran investor Jeremy Grantham warned of an “epic finale” to the stock market “superbubble” inflated by years of cheap money.
“The whole world is now fixated on the growth-reducing implications of inflation, rates, and wartime issues such as the energy squeeze,” Grantham told Reuters news agency.
Add to that COVID-19 in China, food and energy crises, demographics and climate change and “the outlook is far grimmer than could have been foreseen”, he added.
Impact of Ukraine war
The steep decline in the yen in particular has mainly been driven by the differing approaches of the Bank of Japan and other central banks including the US Federal Reserve, which have raised interest rates to tackle soaring inflation fuelled by the Russian war on Ukraine.
David Forrester, senior FX strategist at Credit Agricole CIB in Hong Kong, said breaching 140 yen per dollar marked an “important technical level”.
“Previously, if you look at when the Bank of Japan has intervened to buy the yen, it’s usually been around these levels,” he told AFP news agency.
Earlier on Thursday, Japan’s Chief Cabinet Secretary Hirokazu Matsuno repeated comments about the importance of stability in forex markets, saying that “rapid changes are undesirable”.
But he did not give any indication that special measures, like the finance ministry instructing the Bank of Japan [BoJ] to buy the yen against other currencies to bolster its value, were in the cards.
With volatility increasing, “the government plans to monitor the trend of the foreign exchange market carefully with a high sense of urgency”, Matsuno told reporters.
Last week, US Federal Reserve Chair Jerome Powell declared his commitment to aggressive rate hikes, eliminating hope that the US central bank may soften its position to avoid an economic slowdown.
But policymakers at the BoJ have refused to abandon easy-money measures put in place a decade ago, aimed at generating growth in the world’s third-largest economy and sustained price rises of around two percent.
Also, “higher energy prices throughout the year have been a big weight on Japan’s trade balance and current account balance … but that has eased a little bit recently”, Forrester said.
Inflation in Japan is at its highest in seven years, and prices for items excluding fresh products rose 2.4 percent on the year in July – but the BoJ sees these increases as temporary, and says it is committed to its current policy.
“Inflation in Japan is not only accelerating but broadening out beyond just food and energy price inflation”, which is starting to indicate “that maybe the BoJ does have to shift its stance a little”, Forrester said.
“If they’re stubborn on that front, then the ministry of finance may have to intervene, to reduce imported inflation due to the weaker yen,” he added.