Japanese yen rocked by worst month in SEVEN years


The yen has had a difficult month so far, falling around seven percent, with March being the worst month for the currency since 2016. A big driver of the yen’s decline against the dollar has been a divergence in central bank policy between the two countries. While the US Federal Reserve has moved to tighten policy and raise interest rates, the Bank of Japan has remained in full stimulus mode. So far, the bank’s governor Haruhiko Kuroda has insisted a weaker yen is better for Japan’s economy by boosting overseas profits from exports.

However, export growth has been struggling – meaning the costs of a weaker yen are potentially set to rise.

Craig Botham, chief China+ economist at Pantheon Macroeconomics, noted: “A weaker yen looks more likely to hurt the Japanese corporate sector than to help it, at this juncture, and consumers always lose out.”

Part of Japan’s strategy has been to keep bond yields low, however this now puts it out of sync with the global economy which is seeing bond yields rise rapidly elsewhere.

John Hardy, head of FX Strategy at Saxo Bank, noted: “With bond yields rising aggressively elsewhere in the world, this means that Japanese yields are not adjusting higher and instead the Japanese yen has to absorb the pressure.”

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Meanwhile, energy prices are continuing to cause problems for the region.

Robert Carnell, head of research for Asia-Pacific at ING Think, explained: “The JPY is not the only Asian currency to take a pounding in recent weeks. Most of Asia runs a deficit with respect to energy, and Japan is no exception.

“If you plot the movements of Asian FX since the day before the Russian invasion of Ukraine against its oil and gas trading position (relative to its GDP), the currencies line up pretty well along the line of best fit.

“The ones with the biggest net deficit position have weakened the most.”

He noted, however, that even then Japan was something of an outlier, having weakened “more than you can justify” from this alone.

Questions have now arisen as to whether there may be some policy intervention, either from the central bank or ministry of finance, to prop up the yen.

Mr Carnell predicted the Bank of Japan would not be “all that bothered” unless it began to turn into a disorderly sell-off with traders selling the yen in large volumes and pushing the value down.

Japan’s finance ministry has voiced more concern, labelling “excess volatility and disorderly” movements in the currency as undesirable.

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Mr Hardy said: “It would be far easier for the BoJ to step away from its policy and let yields rise rather than throwing huge amounts of FX reserves at the problem if the yen weakening gets too aggressive, but that will be for the government to decide – it has the final say.

“If the BoJ is forced to cave on policy, the JPY could snap back higher with extreme short-term strength, as it is at multi-decade lows in valuation.”

Historically, Japan has spent considerable sums keeping the yen weak with around $100 billion (£76.38bn) spent in 2003 on interventions which were subsequently abandoned.

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