Yen's Value Plummets... "Falls Further Due to Prolonged US High Interest Rates"

Despite Japan Ending Negative Interest Rate Policy,
Yen Posts Worst Performance Among G10 Currencies
Yen Weakness Continues Amid Prolonged US High Interest Rates
Yen-Dollar Exchange Rate Expected to Reach 160 Yen per Dollar

Despite the end of Japan's negative interest rate policy, the yen's value has continued to decline, and there are claims that it could fall further. This is because the US economy continues to show solid growth, and as the pace of inflation slowdown slows, the Federal Reserve (Fed) is expected to be cautious about cutting interest rates.

[Image source=Yonhap News]

According to Bloomberg on the 2nd (local time), Bank of America (BoA) predicted that if the Fed does not cut interest rates within the year, the yen-dollar exchange rate could rise to 160 yen per dollar. The yen-dollar exchange rate briefly reached 151.94 yen on the 27th of last month, the highest level in 34 years, and maintained the low 151 yen level on the 2nd. This means the yen's value could fall about 6% more than it is now.

The yen has fallen 7% against the dollar this year despite the Bank of Japan's (BOJ) end of the negative interest rate policy, making it the worst performer among the Group of Ten (G10) currencies. The continued decline in the yen's value is due to the short-term interest rate remaining between 0 and 0.1% despite Japan's rate hikes, maintaining a large interest rate gap with the US. The BOJ's plan to continue quantitative easing has also fueled the yen's depreciation.

The Wall Street Journal (WSJ) pointed out that "the yen's value can only rise if the US cuts its benchmark interest rate." However, there is an analysis that the possibility of the Fed cutting rates three times within the year is decreasing.

First, despite high interest rates, US economic indicators are showing strength. The Institute for Supply Management (ISM) announced on the 1st that the March manufacturing Purchasing Managers' Index (PMI) was 50.3, surpassing the 50 baseline for 'improvement in business conditions' for the first time in 17 months. The US inflation rate is exceeding expectations. WSJ evaluated that "the probability of the Fed cutting rates three times within the year has dropped to about half." Matt Simpson, a market analyst at Forex.com, said, "(The prolonged high interest rates in the US) lead to a stronger dollar, which inevitably becomes a headache for Japanese authorities facing the yen's depreciation."

The Japanese Ministry of Finance indicated that if the yen-dollar exchange rate breaks through 152 yen, it would intervene in the foreign exchange market by buying yen and selling dollars. Regarding this, Alvin Tan, head of Asia foreign exchange strategy at RBC Capital Markets, bluntly said, "It will only be a one-off event-driven yen appreciation." For example, in 2022, when the yen-dollar exchange rate exceeded 150 yen, the Ministry of Finance intervened directly in the foreign exchange market three times with about 9 trillion yen, causing the rate to fall to 130 yen by January of the following year (yen appreciation), but it could not stop the subsequent upward trend.

The continued weakness of the yen is bad news for the BOJ, which is considering additional rate hikes. This is because rising prices for energy and food imports could lead to a decline in real wages, which may hurt consumers. There are concerns that this could hinder the BOJ's monetary policy aimed at an economic virtuous cycle centered on prices and wages. Japanese Prime Minister Fumio Kishida is hoping to restore consumer sentiment through income and resident tax cuts scheduled for June.

This content was produced with the assistance of AI translation services.