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The Japanese yen recently touched a low of 153.18 against the U.S. dollar, marking its weakest level since July 31. This significant drop comes as investors grow wary of a growing divergence in monetary policies between the U.S. Federal Reserve and the Bank of Japan. While the Federal Reserve has pursued a hawkish path with persistent interest rate hikes to curb inflation, the Bank of Japan remains in ultra-loose monetary stance. This accommodative policy by the Bank of Japan, coupled with the restless global demand for the U.S. dollar, has driven the divergence between the two currencies, dragging the yen downward in response.
The yen’s current weakness is partly driven by Japan’s struggling economy, which faces deflationary pressure and slow wage growth. These factors force the Bank of Japan to maintain low interest rates to stimulate growth and avert deflation. In contrast, the U.S. economy remains relatively resilient, prompting continual rate hikes from the Federal Reserve, which in turn inflates the value of the U.S. dollar. The widening interest rate differentials have made holding U.S. assets more attractive, further eroding the appeal of the Japanese yen in global markets.
Speculation has also mounted regarding potential currency intervention by Japanese authorities. Japanese policymakers have repeatedly signaled their concern over the yen’s depreciation, underscoring the possible adverse economic consequences such as rising import prices, which make essential costs such as fuel and food more expensive for Japanese consumers. However, even though Japanese authorities have intervened sporadically in the past, there has been no aggressive action yet, partly because intervention could only offer short-term relief as long as the underlying drivers of yen weakness—monetary policy divergence—remain intact.
Forex analysts are closely monitoring the situation, with the focus primarily resting on whether the Bank of Japan may eventually shift toward a tighter policy stance, especially if prolonged yen depreciation continues to hit Japan’s economy harder. For the time being, there is no suggestion the Bank of Japan will back down from its dovish stance. However, if economic conditions worsen, Japan may need to reconsider its strategy, which could lead to a reversal in currency trends in the months ahead. As of now, market participants will continue watching the currency cross between the yen and U.S. dollar, which could remain volatile as global economic conditions evolve.
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