Yen hits lowest level since 2015, and Japan, US fine with it

For the first time since August 2015, a dollar on Monday bought more than 125 yen in forex markets, compared to around 110 yen a year and a half ago. The dollar was changing hands at around 123.93 yen in Tokyo late Monday.

A stronger dollar means Americans and others whose currencies are pegged to the dollar have more bang for their buck when they buy goods made in Japan, a potential boon with US inflation running at around 8%. .

It also means that Japanese manufacturers have lower costs in dollar terms and have an edge over American competitors. This is prompting Japanese policymakers to say that, overall, they are fine with the currency’s move.

“There is no change in the infrastructure that the weak yen has a positive effect on the Japanese economy by raising the overall economy and prices,” Bank of Japan Governor Haruhiko Kuroda told a parliamentary session on Friday.

The central bank estimated in a January report that a 10% depreciation in the yen would increase Japan’s GDP by about 1%.

On Monday, chief government spokesman Hirokazu Matsuno said Japan was watching the market closely and that “any rapid movement is not desirable.”

The yen’s decline stemmed largely from the widening interest rate differential between Japan and the US. After raising rates by the Federal Reserve and making six more hikes this year, the US 10-year Treasury now yields about 2.5%. That’s 10 times the 0.25% yield on par Japanese government bonds – on top of the Bank of Japan’s target range. Meanwhile, the two-year Treasury yield is 2.3%, while the Japanese equivalent yield is less than zero.

On Monday, the Bank of Japan took to the market to defend its policy, offering twice to buy unlimited amounts of 10-year government bonds that would prevent yields from rising further. It said it would conduct similar operations from Tuesday to Thursday. Although lower, the Japanese yield is still higher than at any time since January 2016.

Other things being equal, the US-Japan interest-rate differential makes it better to hold the dollar than the yen, as the returns are higher. In particular, analysts say the yield gap is reviving a “carry trade,” in which investors borrow yen at lower rates and convert the money into more interest-earning dollars.

There is little pressure on Mr. Kuroda at the central bank to raise rates to match the US trend, as inflation in Japan remains relatively calm.

In the past, a sharp decline in the yen would have sparked outrage from US politicians and companies. When he was in office, President Donald Trump often expressed dissatisfaction with the weak currencies of other countries.

“They play devaluation markets, and we sit there like dummies,” Trump said shortly after taking office, separating Japan, China and Germany.

But now, a stronger dollar pushes down the cost of imported goods and stokes inflation, a top concern for the Biden administration in the fall in the midterm election.

The Treasury Department’s most recent forex report, released in December at a time when the yen was already weak, expressed no concerns about the move.

While many Japanese companies have shifted production overseas, limiting the benefits of the weaker yen, there is enough manufacturing remaining in Japan that the gains could be substantial.

The Daiwa Institute of Research estimates that a 10-yen depreciation against the dollar – for example, if the dollar buys 125 yen instead of 115 yen – would increase to approximately 1.5 trillion, a measure of the collective operating profit of Japanese companies. Equals to about $12. Arab. Auto manufacturers in particular still export many Japan-made vehicles to the US, and the dollars they earn from American car buyers are now worth more in yen terms.

Takahiro Sekido, a strategist at MUFG Bank, said it would be difficult for the US to push the dollar down, even if it wanted to, as the world turned to the US for an alternative to Russian energy. Countries need dollars to buy US oil and gas.

“The US has no choice but to accept a stronger dollar, at least in the short term,” Sekido said.

A weaker yen is not entirely good for Japan as it increases the burden of oil and gas imports, which Japan needs dollars to buy. Higher oil prices and unfavorable currency rates eventually lead to consumers who pay more for gasoline and electricity.

The Japanese government is addressing the energy issue not by trying to change currency rates, but by subsidizing oil distributors and creating other aids to ease the sting.

“We must respond flexibly to rising oil and other products prices,” Prime Minister Fumio Kishida said on Monday.

This story has been published without modification to the text from a wire agency feed