Yen falls to 20-year low as BoJ holds fast to stimulus pledge

The yen fell to a 20-year low against the dollar as the Bank of Japan’s ultra-loose monetary policy piles pressure on the Japanese currency at a time when US policymakers at the Federal Reserve are signaling their intent to raise interest rates.

The fall of about 0.5 per cent on Wednesday pushed the yen past ¥ 126 to the dollar, taking the currency almost 9 per cent lower for the year to date.

The BoJ’s pledge to continue stimulus measures in order to bolster Japan’s economy contrasts sharply with the global consensus among central banks, particularly the Fed, where policymakers are expected to raise interest rates this year to rein in surging inflation.

That policy divergence has widened the gap between yields on Japanese and US government bonds as the BoJ anchors the former near zero, weakening demand for the yen and prompting global investors to dump Japanese securities.

Japanese Finance Minister Shunichi Suzuki told reporters on Wednesday that rapid moves in the yen were “very problematic”, and warned that the government was watching currency moves closely.

The yield differential between 10-year Japanese government bonds and similar US Treasuries stood at about 2.5 percentage points on Wednesday, marking the widest margin since mid-2019.

But economists said the BoJ was likely to stick with loose monetary policy despite the yen’s weakening streak.

Line chart of Yen per dollar showing Japan's yen tumbles to two-decade low

“We don’t expect any significant changes or any kind of tweaks from the Bank of Japan as a reaction against the weaker yen,” said Takashi Miwa, Japan’s chief economist at Nomura Securities.

He noted that BoJ officials had so far embraced the weaker yen as a boon for Japanese exporters, with governor Haruhiko Kuroda recently describing the currency’s drop as still “generally positive” for Japan’s economy.

Traders had previously viewed an exchange rate of around ¥ 125 to be close to the threshold of what the BoJ was willing to tolerate. That was the currency’s level in June 2015 when Kuroda said the yen was weak and unlikely to fall any further.

Analysts now expect markets to continue testing the BoJ’s resolve in the lead up to its April monetary policy meeting.

Nomura’s Miwa said a fall to around ¥ 130 against the greenback could force the central bank to consider at least a verbal intervention to help ease the strain on Japan’s small- and medium-sized businesses, but added that political pressures could come into play before then .

“The political response will be driven by ordinary people’s perceptions about the weaker yen,” Miwa said. “That might be reflected in the approval rating of the Kishida administration, and many politicians might start to ask the Bank of Japan to react.”

Additional reporting by Antoni Slodkowski

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