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The Japanese yen has been hovering near its three-month lows, drawing attention from global investors and traders alike. Recently, the yen hit 153.18 against the US dollar, its weakest point since July 31. The currency movement signals lingering pressure on the yen, as economic and monetary policy decisions from both Japan and the United States create widening disparities between the two economies. The main driver behind the yen’s struggles has been Japan’s persistent ultra-loose monetary policy, spearheaded by the Bank of Japan (BoJ). In contrast, the Federal Reserve has consistently increased interest rates in the U.S. to combat inflation, which has bolstered the dollar’s strength on the international stage.
One of the primary reasons for the yen’s depreciation is the divergent monetary policies between Japan and its major trading partners, especially the United States. The Federal Reserve’s aggressive rate hikes have guided the dollar to multi-decade highs, as investors continue to pile into the greenback seeking higher returns. Meanwhile, Japan remains an outlier among major economies, maintaining negative interest rates and continuing with bond-buying programs—a factor that has hampered the yen’s performance. The BoJ’s reluctance to move forward with more restrictive measures shows its prioritization of economic growth and inflation targets over currency strength. As a result, the carry trade, where investors borrow in yen to purchase higher-yielding assets denominated in other currencies, has added additional downward pressure.
For context, inflation in Japan continues to linger below its 2% target despite some recent upticks in price levels. Much of this can be attributed to internal factors such as sluggish wage growth and weak consumer spending, which have kept domestic inflation underwhelming. Hence, there is little impetus for the BoJ to hike rates aggressively. On the flip side, inflation in the U.S. came down from the highs seen earlier in 2022, but the Federal Reserve maintains that more tightening may be necessary—a message that has locked in the dollar’s upper hand against the yen. Moreover, fiscal stimulus measures and rising bond yields in the U.S. look set to attract further inflows of capital.
While some market analysts predict that the yen might eventually claw back some value when the BoJ adjusts its interest rate policy, there remains a significant challenge ahead. Any shift from negative to positive interest rates would have to be accompanied by strong domestic growth, which is currently lagging. Until this happens, most indicators suggest that the yen will continue to face depreciation pressures in the short term, which only serves to amplify the appeal of the greenback as one of the strongest bets in the current currency market.
