Chart of the Week: Yen hits 34 year low against the dollar

The Bank of Japan kept interest rates unchanged at its April meeting on Friday, temporarily propelling the yen below 155 per US dollar, its lowest level since 1990, and fueling speculation that the authorities might step in to prop up the currency. The yen has been depreciating since the beginning of 2021; last month’s decision by the Bank of Japan to end its negative interest rate policy and raise its short-term rate for the first time in 17 years to a range of 0-0.1% does not yet appear to have affected it. The Bank has long grappled with maintaining sustainable price rises to keep the economy out of deflation. Core inflation, which excludes fresh foods, has been above the Bank’s 2% target since April 2022, and recent wage growth has added to confidence among policymakers in the probability of achieving the Bank’s 2% inflation target. When interest rates start to rise this should help support the yen by attracting more overseas investment  — more money flowing into Japan ought to increase demand for the domestic currency. However, Bank of Japan governor Kazuo Ueda has emphasized that any further tightening would be gradual, which was confirmed by Friday’s decision to keep rates steady. Meanwhile, a persistently strong dollar and the wide rate differential between Japan and the US, where the short-term policy rate is between 5.25-5.5%, are also fueling the yen’s weakness. A weaker yen benefits Japanese exporters and tourists visiting Japan as their respective profits and purchasing power increase; however it may fuel inflation in the coming months, as households face higher import costs.

Refresh this chart in your browser | Edit the chart in Datastream

The views expressed in this article are the views of the author, not necessarily those of LSEG.