Yen Tumbles to Seven-Year Low as BOJ Diverges Further From Fed
The yen fell as much as 2.5% to 125.09 against the greenback on Monday, the weakest since August 2015.
(Bloomberg) -- The Japanese yen plunged by the most since March 2020 against the U.S. dollar as the Bank of Japan continued to ease monetary policy aggressively, diverging further from the Federal Reserve’s increasingly hawkish stance.
The yen fell as much as 2.5% to 125.09 against the greenback on Monday, the weakest since August 2015, before paring back some losses to trade near 123.85. The BOJ offered for the first time to buy an unlimited amount of 10-year government bonds over the next three days, capping yields amid a global debt selloff and eroding the currency’s appeal. The Fed raised interest rates earlier this month and signaled more tightening would follow to curb soaring inflation.
BOJ Governor Haruhiko Kuroda’s commitment to continue with stimulus has pushed the spread between U.S. and Japanese benchmark yields to the widest since 2019. The yen is down more than 7% against the dollar so far this year, by far the most among major peers, and analysts say the widening interest-rate differential stands to weaken the currency further.
“As long as global yields continue rising and the Bank of Japan pledges unlimited support for its bond market, the pressure on the JPY to weaken continues,” said John Hardy, the head of currency strategy at Saxo Bank A/S. “The next major resistance in the USD/JPY chart is the near-20 year high from 2015 at 125.86.”
The spread between the U.S. and Japanese benchmark yields has jumped around 70 basis points this year to 2.25%. Investors are bracing for further losses in the near-term. One-month risk reversals, a gauge of positioning in the options market, are the most bearish on the yen since 2015.
Energy Importer
Japan’s exposure to higher oil prices as a net importer means the yen has also lost some of its luster as a haven and hasn’t been able to capitalize on bouts of risk aversion from the war in Ukraine. That has exacerbated its poor performance, in particular against currencies of commodity producing nations.
“The recent improvement in global investor risk sentiment, higher yields outside of Japan and continued upward pressure on commodity prices is proving a potent mix for yen weakness in the near-term,” said Lee Hardman, a currency analyst at MUFG.
Markets have been speculating on the policy implications of the yen’s moves, with economists at JPMorgan Chase & Co saying it could prompt the BOJ to tweak its yield curve control framework, which aims to cap the 10-year yield on government bonds. On Monday, Eisuke Sakakibara, the nation’s former top currency official, told Reuters that Japan should intervene in foreign exchange markets or raise interest rates to help buoy the yen if it falls past 130 to the dollar.
Still, Governor Kuroda said last week stable inflation was needed to trigger policy change at the central bank, not yen weakness. Japanese Chief Cabinet Secretary Hirokazu Matsuno on Monday said the government is paying close attention to trends in foreign exchange markets, including the recent depreciation of the yen.
“The rapid collapse of the yen which we have been observing since the beginning of March is likely to have been too rapid even for the BOJ’s taste,” said Ulrich Leuchtmann, head of currency research at Commerzbank AG. “However, we must not forget: the BOJ should really be in favor of a weak yen.”
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