Yen slides to 24-year low against dollar

• The yen fell to its lowest level versus the dollar since 1998 on Monday.
• Sky-high US inflation drives a growing monetary policy divide between Japan and the US.
• The Bank of Japan has said it will stick with its long-standing monetary easing programme.

On Monday, the yen fell to its lowest level versus the dollar since 1998, as sky-high US inflation drives a growing monetary policy divide between Japan and the world’s largest economy.

For months, Japan’s currency has been sinking, exacerbated by the US Federal Reserve’s strong monetary tightening to combat skyrocketing inflation induced by the Ukraine war and other factors.

But unlike the Fed, the Bank of Japan has said it will stick with its long-standing monetary easing programme which it hopes will lead to stable growth.

The increasingly polar policies have strengthened the greenback, and on Monday one dollar bought 135.19 yen.

Read More: The dollar reaches 135 yen as US yields continue to rise

It’s a level not seen since October 1998 during the Asian currency crisis and marks a dramatic drop from January rates of around 115 yen per dollar.

“The ongoing backdrop to the yen’s fall is the growing gap between long-term interest rates in Japan and the United States,” Takahide Kinouchi, an executive economist at Nomura Research Institute, said in a recent commentary.

And as higher oil prices fuel US inflation, “expectations are growing stronger that aggressive US monetary tightening will continue, for the time being, causing US yields to rise further.”

US consumer prices for May hit a new four-decade high, rising 8.6 percent and topping what economists thought was the peak in March.

In Japan, however, inflation has only just hit the central bank’s long-term target of two percent.

And while the figure represents a seven-year high, the BoJ sees current inflationary pressures as temporary and believes its monetary policy is necessary to produce more long-lasting growth.

Questioned in parliament on Monday, central bank Governor Haruhiko Kuroda acknowledged that the yen’s rapid depreciation was “not desirable”.

“The recent rapid depreciation of the yen increases uncertainties and means companies face difficulties in drafting business plans, thus it is negative for the economy and not desirable,” he said.

– Benefits for tourism, exporters –

But he has shown no inclination to adjust the bank’s policy soon, saying last week that “monetary tightening is not at all a suitable measure” for Japan, whose economy is still recovering from the pandemic, according to Kyodo News.

He has pointed to the benefits of a weaker yen for Japanese exporters, whose overseas profits are inflated when they are repatriated and have seen their stock prices rise in recent months.

On Monday, he urged companies that benefit from the exchange rate to “expand investment and raise wages, which will strengthen a virtuous cycle.”

The weaker yen could also be a boon for the tourism sector, with Japan cautiously reopening to foreign visitors now allowed in on group tours.

“The weak yen helps to support Japan’s export sector directly, and a weaker exchange rate also contributes to looser monetary conditions domestically,” said Alvin Tan, head of Asia forex strategy at RBC Capital Markets in Singapore.

“These will help drive the economic recovery further,” he told AFP.

Although “higher import prices will negatively affect consumers” and the weaker yen will contribute to inflation, particularly given Japan’s reliance on energy imports, this could also be “seen as a positive”, he said.

“It could help to deepen more persistent inflation expectations in a country that has suffered under deflation for so many years.”

The yen’s trajectory may be determined by how the US Fed behaves at its September meeting, with lower-than-expected May inflation readings boosting prospects of additional rate hikes.

However, “there is still a lot of time before then,” said Kinouchi, adding other factors may also be at work, such as increased energy prices following a European Union embargo on most Russian oil imports.

Read More: The yen continues to fall, while the euro remains stable