The yen fell to its lowest level against the dollar in 32 years as the Bank of Japan continues to keep interest rates near zero while central banks around the world are raising rates to fight rising inflation.
The Japanese yen has historically been considered a safe-haven currency for its positive performance at times when global markets move to risk-averse behavior. Before 2022, the yen tended to appreciate against the US dollar 70% of the time when the US stock-benchmark S&P 500 lost more than 3% in a week.
But that status has changed entirely during this year’s downturn, with the yen falling to its lowest level against the US dollar in 32 years. The main reason is a discrepancy in monetary policy between the Bank of Japan (BoJ) and other major central banks, especially the European Central Bank and the US Federal Reserve. While most of the world moves to tighten interest rates to control inflation, the BoJ is holding rates near zero.
“The Bank of Japan is the only major central bank to engage in outright yield-curve control—buying 10-year Japanese bonds to cap yields at 0.25%,” observes Ashraf Laidi, former chief global strategist at City Index and founder of Intermarket Strategy.
Chris Turner, global head of markets and regional head of research for UK & CEE at ING, points to the roots of the current crisis in energy-supply issues: “Here Japan has suffered a negative income shock as import prices rise more quickly than those of export prices.”
To halt the yen’s prolonged decline, the BoJ resorted to intervention, with the government and central bank actively buying on the open market to push the yen higher. Such interventions are unorthodox for developed economies, and this was Japan’s first in 24 years.
However, these moves appear to have achieved, at best, short-term results. According to analysts, the yen will fall further as long as the conditions driving its fall remain in place. Japan’s foreign minister has hinted at the possibility of more interventions, but the government seems committed to keeping monetary policy ultraloose. “Unless the BoJ abandons or even adjusts its current program, interventions will provide only temporary relief,” explains Quincy Krosby, chief global strategist for LPL Financial.