The yen plunged Monday to its lowest level against the dollar since 1998, as soaring US inflation fuels a widening monetary policy gap between Japan and the world’s largest economy.
The Japanese currency has been weakening for months, accelerated by aggressive monetary tightening by the US Federal Reserve to combat soaring inflation caused by the war in Ukraine and other factors.
But unlike the Fed, the Bank of Japan has said it will stick to its longstanding monetary easing program which it hopes will lead to stable growth.
The increasingly polar policies strengthened the greenback, and on Monday a dollar was worth 135.19 yen.
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This is a level not seen since October 1998 during the Asian currency crisis, and marks a dramatic drop from January rates of around 115 yen to the dollar.
“The continued backdrop to the yen’s fall is the growing spread between long-term interest rates in Japan and the United States,” said Takahide Kinouchi, executive economist at Nomura Research Institute, in a recent commentary. .
And as rising oil prices are fueling US inflation, “expectations are growing that aggressive US monetary tightening will continue, pushing US yields higher.”
U.S. consumer prices in May hit a new four-decade high, rising 8.6% and surpassing what economists thought was the March high.
Benefits for tourism, exporters
In Japan, however, inflation has only just reached the central bank’s long-term target of 2%.
And while that figure represents a seven-year high, the BoJ sees current inflationary pressures as temporary and believes its monetary policy is necessary to produce more sustainable growth.
As war in Ukraine pressures global fuel and food prices, household brands from Uniqlo to 7-Eleven announced price hikes, with budget sushi chain Sushiro causing shock when it announced that it will no longer offer 100 yen ($0.75) plates.
But BoJ Governor Haruhiko Kuroda said last week that “monetary tightening is not at all an appropriate step” for Japan, whose economy is still recovering from the pandemic, according to Kyodo News.
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He also pointed to the benefits of a weaker yen for Japanese exporters, whose overseas profits are inflated when repatriated and have seen their stock prices rise in recent months.
The weak yen could also be a boon for the tourism sector, with Japan cautiously reopening to overseas visitors now allowed to take group tours.
“The weaker yen is helping to directly support Japan’s export sector, and a weaker exchange rate is also contributing to looser monetary conditions domestically,” said Alvin Tan, head of foreign exchange strategy for Japan. Asia at RBC Capital Markets in Singapore.
“This will help drive the economic recovery forward,” he told AFP.
Although “higher import prices will negatively affect consumers” and a weak yen will contribute to inflation, especially given Japan’s dependence on energy imports, this could also be “considered as positive,” he said.
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“It could help deepen more persistent inflation expectations in a country that has suffered from deflation for so many years.”
The path of the yen could depend on how the US Fed acts at its September meeting, with worse-than-expected inflation figures for May raising expectations for further rate hikes.
But “there’s still plenty of time until then,” Kinouchi said, and other factors could also be at play, including rising energy prices following the European Union’s ban on most Russian oil imports.
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Post expires at 6:30am on Thursday June 23rd, 2022