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JPY Tumbles As Fed’s Inflation Fight Heats up

  • The yen plunged to 135 yen to the dollar Monday — its lowest in 24 years.
  • The Bank of Japan has maintained ultra-loose monetary policy as other central banks start hiking interest rates.
  • The yen has lost 15% against the dollar this year, making it the worst-performing G7 currency.

The yen hit its lowest level against the dollar in 24 years on Monday as traders signaled their belief that the Bank of Japan will press ahead with its ultra-loose monetary policy, just as the

Federal Reserve

must battle US inflation at 40-year highs.

The currency was last flat at around 134.38 yen to the dollar, having touched an overnight low of 135.16 yen. — its weakest since October 1998. The yen is down 14.5% against the dollar this year, making it the worst-performing of the G7 currencies against the greenback.

Investors appear convinced the Bank of Japan will maintain its low interest-rate policy, even as central banks around the world tighten monetary policies to try to curb soaring inflation.

When interest rates rise, a currency tends to appreciate because it offers better returns to investors. While the Fed  has hiked rates to 1% this year and indicated it’ll continue to push rates up, the BoJ has kept interest rates negative since 2016.

“The central bank divergence trade is in full play and the yen is being carted out,” Chris Weston, head of research at the foreign exchange broker Pepperstone, said.

US data on Friday showed consumer inflation rose by more than expected in May, hitting 8.6%, which would suggest it has not yet peaked and the Fed may need to ramp up rates even more aggressively as a result.

On Friday, the Bank of Japan, the Ministry of Finance and the Financial Services Agency made a rare joint statement expressing concerns about the yen’s sharp falls. It briefly stabilized before its decline resumed in early-morning Monday trading.

A weaker yen has typically boosted Japan’s economy because it exports more than it imports. When a country’s currency depreciates, its exports become more competitive in global markets.

But Bank of Japan governor Haruhiko Kuroda said on Monday that there are also considerable downsides to a weak yen, such as rising economic uncertainty.

“Recent sharp yen falls are raising uncertainty over the outlook and making it difficult for companies to compile business plans, so they are negative and undesirable for the economy,” Kuroda said.

A weak currency also contributes to raising inflation, as the price of imported goods increases. Consumer inflation in Japan is running at 2.5%, compared with 8.6% in the United States. But this is the highest rate of inflation for Japan since 2014. 

Japanese stocks tumbled Monday, with the Nikkei 225 down 3.01% at the closing bell.

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