The yen remained stuck around a 34-year low against the dollar after months of declines, raising concerns that the currency is becoming a liability for Japan’s economy and stocks.
At the time of writing, at approximately 3pm on Wednesday 24 April, the USD/YEN pair is trading at 154.91, after having reached a peak of 155.17, the strongest level since 1990.
The decline in the Japanese currency It comes after a series of strong US inflation data pushed the dollar at five-month highs and have bolstered expectations that the Fed is unlikely to be in a rush to cut interest rates this year. The collapse of the yen against the dollar has revived expectations of a currency intervention. Japanese Finance Minister Shunichi Suzuki and other politicians have said they are watching currency movements closely and will respond if necessary.
The strong greenback was a topic debated at the spring meeting of the International Monetary Fund and World Bank in Washington last week, and the United States, Japan and South Korea issued a rare joint statement on the issue.
The financial shock and for theJapanese economy from such a weak currency could be riskier – and longer – than expected.
What happens to the yen and what are the effects of the collapse?
The depreciation of the Japanese currency has helped the country’s stocks reach record highs, as many of the domestic firms are manufacturers whose income earned abroad rises in yen terms. In the broad Topix index, transportation companies, including automakers and electrical machinery companies, account for 25%.
But the yen’s decline did increase import costs in Japankeeping domestic consumer spending tepid since the currency began weakening in 2022. That has weighed on companies that rely on the domestic market for profits.
Companies including retailers and train operators underperformed the broader market, despite record numbers of tourists visiting from abroad. Earnings announcements from most Japanese companies in the coming weeks will likely highlight the growing divergence between strong and weak companies.
Business leaders in Japan joined politicians in expressing alarm over the collapse of the yen, with the head of the nation’s largest business lobby group, known as Keidanren, saying on Tuesday that the weakening was too much. Government officials have warned that they are ready to act in the currency market, but with the yield gap between Japan and the United States remaining wide, the effects of the intervention may be temporary.
Optimistic investors are betting that i largest wage increases in the last 30 years will spur a recovery in spending this year. The prevailing hypothesis behind this view is that the Federal Reserve will begin cutting interest rates in the coming months, helping the yen rebound. But these expectations are fading due to strong US economic data.
Bank of Japan in action?
Speaking after the meeting of G20 financial leaders in Washington, Bank of Japan Governor Kazuo Ueda said the Japanese central bank could raise interest rates again if the yen’s decline would push inflation significantly higher, highlighting the dilemma why the weak currency has become politicians.
The Bank of Japan will conclude its last policy meeting on Friday and anticipation over decisions is rising.
“For the BoJ to support the yen, it should recognize that the policy was accommodating, that the next increase is imminent in June and that the final rate would be higher than expected by the market. But this is unlikely to be the case.”said Shusuke Yamada of BofA Securities Japan Co.
Since a sudden hawkish shift is not expected, this week’s BOJ meeting could lead to a rally of the dollar/yen above 155 yen according to Yamada.
