Japanese Yen’s Decline is Fully Explainable, but It Becomes Too Dangerous by Its Colossal Momentum

The Japanese Yen fell to a 24-year low against the U.S. dollar, reflecting the divergence in monetary policy actions between the U.S. Federal Reserve and the Bank of Japan (BOJ). The yen has depreciated 22.8% relative to the dollar YTD, making it the worst-performing currency among major economies in 2022 thus far.

The yen sank to a new 24-year low of 136.58 yen to the U.S. dollar on Wednesday June 29, as import-dependent Japanese companies continue to buy the U.S. currency and stake their bets on tighter monetary policy on the part of the BOJ. Analysts believe the retreat past the 136 yen level is a game changer, and could present a sheer ordeal for Japanese monetary authorities.

Apparently, the violent weakening of the yen in recent months has been driven by the diverging monetary policy stances of central banks. Over recent months, the U.S. Federal Reserve has raised interest rates considerably in order to combat surging inflation, recently raising its benchmark federal funds rate by 75 basis points (bps), at its June policy meeting of the FOMC. Further increases to the fed funds rate are expected in July and September, with Fed officials suggesting the possibility of another 75-bp increase.

Meanwhile, the Bank of Japan has maintained its ultra-accommodative monetary policy stance, keeping its benchmark short-term interest rate at a record low -0.1%. The BOJ has set an upper limit of 0.25% for yields on 10-year Japanese government bonds (JGBs). The 10-year JGB yield was at 0.22%, while the 10-year U.S. Treasury note yielded 3.09%.