The yen fell to a two-decade low against the dollar due to the widening gap in the yield between the yen and the dollar, raising concerns about possible intervention by the government. With benchmark Treasury yields trading over the carefully watched 3% barrier, the Japanese currency plummeted as much as 0.8% to 132.94/$, the lowest since April 2002. It fell to a seven-year low against the Euro and the Australian dollar, exerting more pressure on the Japanese government, which is already under criticism over the increasing prices.
Widening Interest Rate Gap
In the US, the yield on 10-year Treasuries surpassed 3% for the first time since mid-May owing to expectations that the Federal Reserve will act aggressively to combat inflation. The depreciation of the yen resulted from a growing interest rate differential between the US and Japan, besides high prices of crude oil, which widened the trade imbalance for an energy-scarce Japan.
Japan – Early Signs of Trouble?
The International Monetary Fund lowered its GDP predictions for Japan this year by 0.9 percentage points to 2.4% in May. In an environment of global inflation, the decision of the Bank of Japan (BOJ) to maintain ultra-low interest rates is contributing to the weakening of the yen, as other central banks increase interest rates to combat inflation.
Outlook
For the time being, BOJ Governor Haruhiko Kuroda reiterated his commitment to maintaining ultra-low interest rates. "The BOJ will continuously continue with the current significant monetary easing and strongly support economic activities," Kuroda said. "We want to create a virtuous cycle in which prices grow gradually while corporate earnings, employment, and salaries rise.” To combat the depreciation of the yen, BOJ is expected to introduce some flexibility in its interest rate target. By reopening the idle nuclear reactors, the government would be able to reduce its energy imports, while tourism would profit from the elimination of entry restrictions.
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