TOKYO, July 23 — The Japanese yen appears to be on an inexorable decline and authorities will struggle to reverse that, analysts warn, as the currency wallows at a four-decade low against the dollar.
A report that the Bank of Japan was considering speeding up its pace of interest rate hikes helped the unit inch higher Thursday, a day after hitting 163.24 to the greenback, its weakest level since December 1986.
Finance Minister Satsuki Katayama has vowed “decisive actions as needed” to support the currency, having suggested several times in recent weeks that officials were ready to step into markets with financial interventions.
The central bank is widely expected to keep interest rates unchanged on July 31, having hiked them to a 31-year high last month, with most economists predicting the next increase in December.
But Bloomberg News reported that monetary policymakers were open to hiking at a faster pace owing to the effect on inflation from the weaker yen. Consensus among economists has been for an increase every six months or so.
While surging oil prices and concerns over debt are major reasons for the currency’s weakness, a key driver is the gap between BoJ interest rates and those in the United States and other big economies.
And with bets on the Fed hiking again at least once before the end of the year, the pressure is growing.
This gap means investors borrow yen cheaply and invest in other assets outside Japan with better returns – known as a “carry trade” – resulting in capital outflows and downside for the yen.
Katayama this month urged Japan’s pension funds to increase investments in domestic assets, which briefly boosted the yen and eased pressure on bond yields.
But more work is needed to end the slide.
“Tokyo can stop the traffic for an afternoon, but it has yet to convince the market that the motorway itself has changed course,” said Stephen Innes at SPI Asset Management.
“The problem is that Japan’s own policy choices continue to point toward a weaker currency. The government wants stronger growth, more investment and continued fiscal support,” Innes said.
“The BoJ wants to normalise, but only gradually, because the cost of moving too quickly could show up in the JGB (Japanese government bond) market, the debt-service burden and the broader economy.
“Meanwhile, households and institutions can still earn more by sending capital abroad.”
Economists at Standard Chartered highlighted that previous interventions by Japan – it splurged 11.7 trillion yen in May – have done little to halt the slide. The same was the case after similar moves in 2024.
The yen “remains near its weakest level in four decades, underscoring the limited lasting impact of prior efforts”, Standard Chartered said.
IG analyst Fabien Yip added: “Unless paired with a genuine shift in BoJ policy, intervention will continue to function as a circuit-breaker rather than a cure for yen weakness.”
Disruptions to oil shipments because of the Middle East conflict, as well as rising US Treasury yields, were also likely to weigh on other Asian currencies, said Lloyd Chan at MUFG.
“Many regional economies remain highly dependent on imported energy, including Japan, Korea, Singapore, the Philippines, and Thailand,” Chan said.
“Should oil prices remain elevated and concerns over fuel shortages persist, the spillover effects could be significant, particularly for energy-intensive industries and economies with large external energy needs,” he said. — AFP
