TOKYO, June 26 (Xinhua) -- The Japanese yen recently weakened to as low as 161.93 against the U.S. dollar, hovering near its weakest level since December 1986, as growing expectations of further U.S. interest rate hikes intensified downward pressure on Japan's currency.
Analysts believe that while the yen's previous depreciation was largely driven by rising global energy prices, widening monetary policy divergence between Japan and the United States has once again made interest rate differentials the dominant force behind the currency's decline.
As Japan becomes increasingly dependent on imports of energy and raw materials, the traditional benefits of a weaker yen for exports have gradually diminished, while its negative impact on households and businesses has become more pronounced. Meanwhile, Japan faces limited policy options, as foreign exchange intervention is unlikely to reverse the trend and faster interest rate hikes could undermine the country's fragile economic recovery.
WIDENING INTEREST RATE GAP WEIGHS ON YEN
The immediate catalyst behind the latest round of yen depreciation has been changing market expectations regarding U.S. monetary policy.
Recent U.S. economic data showed stronger-than-expected employment growth and slower-than-expected easing of inflation, reinforcing expectations that the U.S. Federal Reserve may resume raising interest rates. Bank of America recently forecast that the Fed could raise rates by 25 basis points each in September, October and December.
Expectations of higher U.S. interest rates have pushed Treasury yields higher and lifted the U.S. dollar index to its highest level in more than a year.
By contrast, although the Bank of Japan (BOJ) has ended its long-standing ultra-loose monetary policy and raised its policy rate to 1 percent this month, markets generally expect the pace of future tightening to remain significantly slower than that of the U.S. Most analysts expect the BOJ to raise rates only about once every six months.
Against this backdrop, investors increasingly expect the interest rate gap between the two countries to widen further. Since higher U.S. interest rates improve returns on U.S. dollar-denominated assets while Japanese interest rates remain comparatively low, capital has continued flowing toward the U.S. dollar, leaving the yen under sustained pressure.
Analysts believe the yen is unlikely to stage a meaningful recovery as long as expectations of widening U.S.-Japan interest rate differentials continue to dominate market sentiment.
WEAKER YEN NO LONGER ECONOMIC BLESSING
For decades, a weaker yen was widely regarded as a key driver of Japan's economic growth.
As major exporters of automobiles, machinery and electronics relied heavily on overseas markets, yen depreciation enhanced the price competitiveness of Japanese products while boosting the value of overseas earnings when converted back into yen. Moderate currency weakness was therefore often viewed by both policymakers and businesses as a source of economic strength.
However, that logic has gradually changed.
Following decades of industrial restructuring and overseas production shifts, Japan has become increasingly reliant on imports of energy, food and raw materials. Earlier tensions in the Middle East had already pushed up international energy prices, further increasing Japan's import bill. Under such circumstances, yen depreciation, while benefiting large multinational exporters, directly raises import costs, driving up prices for goods and services and placing greater pressure on both households and businesses.
In recent years, Japanese consumers have faced persistent increases in the prices of food, energy and daily necessities. Prices of coffee beans, chocolate, cooking oil and various imported foods have repeatedly hit record highs, while electricity and gas bills have also risen significantly. Wage growth has remained insufficient to fully offset higher living costs.
Daisuke Karakama, chief market economist at Mizuho Bank, noted that the gains from a weaker yen are largely concentrated among globally competitive corporations, whereas small- and medium-sized enterprises and ordinary households bear most of the rising costs. As resource prices and living expenses continue to climb, the negative effects of yen depreciation have become increasingly evident.
LIMITED ROOM FOR POLICY RESPONSE
As the yen approaches another psychologically important threshold, pressure on the Japanese government to stabilize the currency has intensified. Yet markets remain skeptical about the effectiveness of potential intervention.
Makoto Noji, chief foreign exchange and foreign bond strategist at SMBC Nikko Securities, argued that the joint currency intervention conducted by Japan and the United States earlier this year was intended primarily as a warning over Japan's fiscal discipline and concerns that rapidly rising Japanese government bond yields could spill over into the U.S. bond market. In his view, Washington has little incentive to intervene solely to support the yen against the U.S. dollar.
Many market participants also believe that even unilateral intervention by Japan would have only limited impact. Maki Ogawa, chief analyst at Sony Financial Group, said that intervention is difficult to sustain while the U.S. dollar continues to strengthen globally and is unlikely to reverse the broader trend.
Apart from exchange market intervention, the BOJ also faces constraints in adjusting monetary policy. On one hand, prolonged yen weakness raises import costs, fuels inflation and weakens consumer spending. On the other hand, aggressive rate hikes designed to support the currency could slow economic growth while increasing Japan's already heavy fiscal burden.
Analysts believe that amid widening monetary policy divergence among major economies, Japan is facing one of its toughest currency tests in recent years. The latest bout of yen weakness not only challenges Tokyo's ability to stabilize the exchange rate, but also exposes deeper structural vulnerabilities in Japan's growth model, fiscal position and policy flexibility. Enditem
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