Japanese yen’s pain is far from over

Badly hit: Pedestrians are reflected on a board displaying a graph of the Japanese yen exchange rate outside a brokerage in Tokyo. The currency has lost over a fifth of its value this year and hit a 24-year low of 146 per dollar (RM4.63) recently. — Reuters

TOKYO: Japan’s yen will recoup only a third of its big losses against the US dollar in the coming year as the policy gap between the ultra-hawkish US Federal Reserve (Fed) and the extremely dovish Bank of Japan (BoJ) is set to widen further, a Reuters poll has found.

The policy divergence has battered the currency.

It has lost over a fifth of its value this year and hit a 24-year low of 146 per dollar (RM4.63) recently, so authorities intervened in the foreign exchange market for the first time since 1998 last month, spending 2.8 trillion yen (RM89.7bil).

Despite the intervention and expectations of more to come, the yen’s weakness is not over yet as BoJ governor Haruhiko Kuroda is unlikely to reverse his long-held pledge to keep policy ultra-loose anytime soon.

The currency, the worst performer among its G10 peers, will trade around the current 144 versus the US dollar at year-end, according to forex strategists in a Reuters Sept 30-Oct 5 poll.

If realised, the yearly loss of more than 20% would be the biggest since 1970.

“US dollar/Japanese yen’s uptrend unlikely to reverse as it is supported by US-Japan policy gap and balance of payment deficit, while intervention was unilateral,” said Shusuke Yamada, forex strategist at Bank of America Securities.

“The Finance Ministry trying to manage forex volume may suggest the BoJ not yet under pressure from the government to modify policy in response to weak yen.”

This year’s rise in US Treasury yields has put upward pressure on benchmark 10-year Japanese Government Bond yields leading the BoJ, which remains an outlier among global central banks, to go for massive bond-buying to protect its de facto yield cap that fuelled the yen’s slide.

Core consumer inflation in Tokyo was its highest since 2014 in September and is a leading indicator of nationwide price rises.

That means inflation is likely to stay above the central bank’s 2% target in the near future, potentially making it harder for the BoJ to justify its ultra-easy policy.

Meanwhile, the Fed, which delivered its third straight 75-basis-point hike last month, was expected to continue with aggressive rate hikes, paving the way for the US dollar to remain strong.

Although the yen, until recently a safe haven for investors during financial market turmoil, was predicted to gain around 7% to trade at 135 against the dollar over the coming year, it would be only a third of this year’s losses of over 20%.

Also, nearly a third, 18 of 60 strategists predicted the currency to trade above the 24-year low of 145.89 per US dollar at some point in the next year.

“The determination of the BoJ to maintain its ultra-loose monetary stance through yield curve control has been a clear signal for selling the yen,” noted Derek Halpenny, head of research at MUFG.

“It is hard to see a turn in US dollar/Japanese yen now even after intervention by the Finance Ministry. The Fed and global central banks have more tightening to do while the BoJ does nothing but ease.” — Reuters

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