Investors prepared for more vigorous interest rate increases by the Federal Reserve, which would make the yen significantly less appealing. The currency dropped to 139.69 per dollar, the lowest level in 24 years.
After the remarks of an executive from the Japanese Ministry of Finance regarding the recent fluctuation in the national currency, Hirokazu Matsuno, the Chief Cabinet Secretary, noted that the market volatility for the Japanese yen has been emphasized in recent times and that “sudden exchange-rate fluctuations are not desirable. It’s important for currencies to move stably reflecting fundamentals.”
By hinting that policymakers are going to intervene in the FX market, for instance, by buying dollars at a discount to the yen to strengthen the Japanese currency, such remarks are meant to cause traders to exercise caution. Yet, there is no clear indication that Japan can respond in this manner right away.
The fundamental cause of the yen’s decline from about 115 per dollar since the start of 2022 is the wide disparity between interest rates which are much higher in the US due to their hawkish raises, and the Bank of Japan taking a more dovish stance by keeping interest rates lower.
The yen’s weakness was once commended for encouraging exports, but it is now increasing the price of importing raw materials and expensive gasoline, thus giving Japanese officials quite the hardship to deal with.
The weak yen might harm company profitability and consumer spending by raising the cost of imported items. Continued yen depreciation is detrimental to Japan’s economy and might stall its return to health following the impact of COVID-19, explained Ichiyoshi Securities’ chief economist, Nobuyasu Atago.
The economy of Japan could be bolstered against the hit of growing living costs could increase if the dollar/yen breaks over the psychologically significant level of 140, as per some analysts, due to the Prime Minister facing pressure to increase expenditures.
Regardless of the possible harm from future yen dips, there are now limited choices for Japanese regulators to stop the fall of the currency other than attempting to intimidate markets.
Prior to considering intervention in the foreign exchange market to bolster the weakened currency, Tokyo would require informed consent from other G7 members. Given Washington’s opposition to currency intervention, obtaining an agreement would presumably be challenging. Analysts claim that the United States has no motivation to stop dollar increases, which reduces its rising inflation.
A currency can also be supported by increased interest rates, but the Bank of Japan (BoJ), due to the weak economy of the country as well as the curbed inflation, has almost no motivation to take an aggressive stance to interest rate hikes.