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On 13 June, Japan’s yen slumped to ¥135.19 per dollar, breaking down through the historic low of ¥135.15 reached during Japan’s 2002 banking crisis and settling at its weakest value since 1998.
It was the yen’s sixth consecutive day of losses, with the yen down 16 percent in value so far this year, making it the world’s worst-performing major currency.
On the same day, the Topix stock index sank by 2.2 percent, its worst single-day performance since 7 March.
The losses were triggered by investors harboring in dollars after a report that the U.S. inflation rate reached 8.6 percent last month, raising expectations that the U.S. Federal Reserve will boost its rate by more than the expected half-point when it meets this week.
The feeble yen makes imports more expensive. Japan must bring in virtually all of its fossil fuels from elsewhere, the price of which has more than doubled in the past 12 months.
While households pay the price for the currency’s weakness, the frail yen makes exports cheaper abroad, nourishing Japan’s manufacturing industry.
The weak yen also pressures China, South Korea, Vietnam, and other Asian export economies to lower their prices to retain market share.
“Given the recent price action and the fundamentals supporting it, we now see a risk of USD / JPY remaining above ¥130 longer than we previously assumed,” Yojiro Goto, currency strategist at Nomura, said in a comment quoted by the Financial Times.
The yen plummeted to record lows below ¥145 to the dollar in 1998 amid Asia’s widespread financial crisis.
Bank of Japan (BoJ) governor Haruhiko Kuroda has issued stern warnings that a yen this weak is a danger to the economy.
However, “While Japanese authorities have stepped up warnings, there are few tools available to stop this momentum,” Akira Moroga, currency strategist at Aozora Bank.
“The environment remains ripe for speculators” to widen the gap between the dollar and yen, he added.
The growing chasm between the dollar and yen “is unlikely to stop until the U.S. economy slows or inflation peaks,” Yuji Saito, foreign exchange director at Credit Agricole CIB, told Bloomberg.
The yen will have to sink below ¥140 to the buck before the BOJ will shift policy, according to the consensus view among economists Bloomberg surveyed.
While the U.S. and other nations are raising interest rates, the Bank of Japan (BoJ) has held its rate at -0.1 percent, where it has been since 2016, in a failing attempt to boost the country’s lackluster economy.
The BoJ also continues buying bonds to keep interest rates at rock bottom, including another purchase of ¥500 billion yen—about $3.7 billion worth—scheduled for 14 June to force rates to remain low.
The new round of buying follows a jump in the 10-year bond yield above 0.25 percent, breaking through the bank’s target limit for the first time since January 2016.
“The BOJ will now need to explain clearly what is the logic behind the 0.25% cap and whether that level is appropriate under the current environment,” Daiwa Securities economist Mari Iwashita, said in a Bloomberg interview.
TREND FORECAST: Japan’s economy was expected to shrink 1.8 percent in this year’s first quarter according to a Reuters poll of economists. But with private consumption remaining resilient, it declined slightly, falling 0.5 percent from January to March.
However, with the Ukraine War persisting and as a result numerous commodity prices continuing to rise while the yen is weakening, it will cost consumers much more to buy much less. Thus, the trend-line is pointing to a period of Dragflation in Japan by year’s end.
And, despite the spiking prices and falling yen, the government will make a bad situation much worse as it has reiterated that the BOJ will continue with monetary easing
TRENDPOST: Haruhiko Kuroda, governor of the Bank of Japan, has apologized for a comment last week suggesting he was happy that Japanese were accepting higher prices without complaint.
The yen is down 16 percent against the dollar this year, reaching a 22-year low of ¥135.19 to the buck on 13 June.
The weaker yen makes imports more expensive; Japan imports all fossil fuels, which have more than doubled in price in the last year and which Japan must pay for in dollars.
In a 6 June speech, Kuroda seemed to say that Japan’s citizens have developed a tolerance for higher prices, which indicates the nation is escaping from a deflationary cycle that has kept the economy weak for decades.
Opposition politicians highlighted the remark and said Kuroda is happy about rising costs.
Soon after his speech, the hashtag “we do not accept higher prices” was trending.
We note this, since the “Bigs” and the wealthy are essentially unaffected by rising prices and are not concerned with how much it costs to fill up their car with gas.