The yen has fallen below 162 per dollar, marking its lowest value in 40 years. The exchange rate surpassed the psychological barrier of 161.96 yen, which was seen as a defense line by Japanese authorities. The dollar's strength has been fueled by expectations of further interest rate hikes in the U.S., while declining hopes for additional rate increases from the Bank of Japan have intensified selling pressure on the yen.
According to the Nihon Keizai Shimbun and Yomiuri Shimbun, the yen reached 161.98 per dollar in New York trading on June 29, the highest level since December 1986. This indicates a significant deepening of yen weakness. On June 30, the yen-dollar exchange rate in Tokyo exceeded 162 yen, hovering around 162.1 yen as of 10 a.m.
The previous record of 161.96 yen per dollar set last July had acted as a psychological resistance level. The breach of this level on June 29 has been reported by the Nikkei, which noted that the yen continues to trend downward.
The primary driver of the yen's depreciation is the anticipation of further interest rate hikes in the U.S. Strong employment, consumption, and economic indicators have emerged, compounded by inflationary pressures from geopolitical instability in the Middle East. As a result, market speculation has increased regarding the Federal Reserve's potential for additional rate hikes this year.
Yomiuri noted that as inflation persists in the U.S., the likelihood of further rate increases has led to stronger demand for dollars and selling of yen. If U.S. interest rates rise further, the attractiveness of dollar-denominated assets increases, which also stimulates yen selling due to the widening interest rate differential between the U.S. and Japan.
The Bank of Japan raised its policy interest rate to 1% on June 16, the first increase in 31 years, but this did not lead to a rebound in the yen. Expectations that the pace of further increases would be slow, along with Japan's low real interest rates considering inflation, have continued to exert pressure on the yen.
The Nikkei reported that the Japanese government plans to emphasize the importance of "appropriate monetary policy management" in its economic and fiscal policy guidelines to be set in July. This has been interpreted by the market as an intention to restrain further rate hikes by the Bank of Japan, leading to a prevailing trend of yen selling and dollar buying. A currency dealer at a Japanese bank attributed the yen selling to concerns over fiscal expansion.
Structural factors contributing to yen weakness remain. Japan's heavy reliance on energy imports means that rising oil prices increase demand for dollar payments, and geopolitical instability in the Middle East strengthens the demand for safe-haven dollars. Additionally, the expansion of overseas stock investments through Japan's new NISA accounts has also contributed to yen selling and dollar buying pressure.
In the spring of 2021, the yen was trading around 110 per dollar. Yomiuri reported that the yen's value has fallen by more than 30% against the dollar over the past five years. The Nikkei noted that the trend of yen depreciation began significantly in 2022.
As the yen enters a historically weak phase, the possibility of government intervention in the market is being closely watched again. Since last year, the Japanese government has intervened by buying yen and selling dollars or issuing warnings whenever the yen's decline has intensified. According to the Nikkei, Finance Minister Shunichi Suzuki held online discussions with U.S. Treasury Secretary Scott Vessen on June 22 and emphasized on June 23 that the agreement between the U.S. and Japan to take decisive action if necessary remains unchanged.
However, reversing the trend of yen depreciation through verbal or actual market intervention is challenging. With expectations of further rate hikes in the U.S. still alive and the pace of additional increases from the Bank of Japan uncertain, selling pressure on the yen, influenced by the interest rate differential, is unlikely to dissipate easily. The Nikkei reported that the market is closely watching upcoming U.S. employment statistics to gauge the direction of the exchange rate.
* This article has been translated by AI.
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