TOKYO: The yen plunged to its lowest level against the dollar since 1998 on Monday as sky-high United States inflation fuels a widening monetary policy gap between Japan and the world’s largest economy.
The Japanese currency has been weakening for months, accelerated by the Federal Reserve’s (Fed) aggressive monetary tightening to tackle soaring inflation caused by Russia’s invasion of Ukraine and other factors.
But unlike the Fed, the Bank of Japan (BoJ) has said it would stick with its long-standing monetary easing program, which it hopes would lead to stable growth.
The increasingly polar policies have strengthened the greenback, and on Monday one dollar bought 135.19 yen.
It’s a level not seen since October 1998 during the Asian currency crisis, and marks a dramatic drop from January rates of about 115 yen to the dollar.
“The ongoing backdrop to the yen’s fall is the growing gap between long-term interest rates in Japan and the US,” Takahide Kinouchi, executive economist at the Nomura Research Institute, said in a recent commentary.
And as higher oil prices fuel US inflation, “expectations are growing stronger that aggressive US monetary tightening will continue for the time being, causing US yields to rise further,” he added.
US consumer prices hit a new four-decade high in May, rising 8.6 percent and topping what economists thought was the peak in March.
In Japan, however, inflation has only just hit the central bank’s long-term target of 2 percent.
And while the figure represents a seven-year high, the BoJ sees current inflationary pressures as temporary, and believes its monetary policy is necessary to produce more long-lasting growth.
Questioned in parliament on Monday, BoJ Governor Haruhiko Kuroda acknowledged that the yen’s rapid depreciation was “not desirable.”
“The recent rapid depreciation of the yen increases uncertainties and means companies face difficulties in drafting business plans, thus it is negative for the economy and not desirable,” he said.
But he has shown no inclination to adjust the bank’s policy soon, saying last week that “monetary tightening is not at all a suitable measure” for Japan, whose economy is still recovering from the coronavirus pandemic, according to Kyodo News.
He has pointed to the benefits of a weaker yen for Japanese exporters, whose overseas profits are inflated when they are repatriated and have seen their stock prices rise in recent months.
On Monday, he urged companies that benefit from the exchange rate to “expand investment and raise wages, which will strengthen a virtuous cycle.”
The weaker yen could also be a boon for the tourism sector, with Japan cautiously reopening to foreign visitors now allowed in on group tours.
“The weak yen helps to support Japan’s export sector directly, and a weaker exchange rate also contributes to looser monetary conditions domestically,” said Alvin Tan, head of Asia forex strategy at RBC Capital Markets in Singapore.
“These will help drive the economic recovery further,” he told Agence France-Presse.
Although “higher import prices will negatively affect consumers” and the weaker yen will contribute to inflation, particularly given Japan’s reliance on energy imports, this could also be “seen as a positive,” Tan said.