Yen hits 24-year low against the dollar as Japan sticks to loose monetary policy

The yen plunged to a 24-year low of ¥135.19 against the dollar on Monday, with the currency’s slide drawing increasing scrutiny from Japanese authorities wary of its rapid weakening.

Following a week of setting fresh 20-year lows, the yen continued its descent as traders bet that the Bank of Japan will remain the only major central bank to maintain ultra-loose monetary policy despite its counterparts in the US and Europe entering an interest-rate raising cycle.

“It’s important that currency rates move stably reflecting fundamentals. But there has recently been sharp yen declines, which we are concerned about,” Japan’s chief cabinet secretary Hirokazu Matsuno told reporters in Tokyo.

“We are ready to respond appropriately as needed, while communicating closely with each country’s currency authorities,” said Matsuno. He declined to comment on whether the government would intervene to stop the yen’s decline.

On Friday, the Bank of Japan, Ministry of Finance and Financial Services Agency issued a rare joint statement expressing concern about the yen’s steep slide against the dollar. The yen has fallen over 20 per cent against the dollar over the past 12 months.

The statement briefly bolstered the Japanese currency, but it gave up most of its gains by Friday afternoon, setting the stage for further falls on Monday.

Currency analysts had warned last week that the yen was likely to remain highly volatile against the dollar ahead of the BoJ’s monetary policy meeting on Thursday and Friday. The focus is now on whether BoJ governor Haruhiko Kuroda will signal any shift in his position that a weaker yen is generally positive for the Japanese economy.

Yields on US Treasury two-year debt rose 0.08 percentage points to 3.145 per cent, near the highest level since the beginning of the financial crisis in late 2007.

The Nikkei 225 Japanese stock index, which typically rises when the yen falls because a weaker currency is seen as positive for exporters, fell 3 per cent on concern over the broader impact on the economy.

The recent weakness of the yen prompted the chief executive of Nomura, Japan’s biggest investment bank, to tell the FT that the phenomenon could trigger a wave of dealmaking by foreign private equity funds and other investors.

Some analysts have begun to argue that the weakening yen, despite its long reputation for boosting the profits of large parts of corporate Japan, was actually harming the economy.

The Daiwa Institute of Research said that if the yen decreased 10 per cent from 116.2 yen against the dollar, which was near the middle of the range it traded in during the January-to-March quarter, real GDP for the fiscal year through March 2023 would decrease 0.05 per cent. The economic hit would come from the increase in import prices offsetting the positive effects of more competitive exports due to the weaker currency.

Yunosuke Ikeda, chief strategist at Nomura, noted that in a speech last week, Kuroda indicated that because of his wish to encourage higher wages, he had no intention of changing the BOJ’s accommodative monetary stance.

“The increasing shift towards overseas production in the manufacturing sector has reduced the ability of yen depreciation to lead to “good” inflation via economic expansion,” said Ikeda.