The sell-off in the yen continued, with investors expecting the interest rate gap between Japan and the US to widen as the Bank of Japan remains committed to its ultra-loose monetary policy while the Federal Reserve signals further rate hikes.
The Japanese currency has fallen by 25 against the dollar since the beginning of the year. Crossing 140 marks another milestone in the sell-off for the yen in terms of investor sentiment.
Thursday’s move in the yen followed fresh data on US manufacturing. The Institute for Supply Management’s gauge of factory activity beat analysts’ expectations in August, suggesting the Fed had a free hand to continue fighting inflation.
Speaking at the Jackson Hole central bankers’ conference last week, Fed chair Jerome Powell said, “Restoring price stability will likely require maintaining a restrictive policy stance for some time.”
A weak yen was once welcomed as a tailwind for Japan’s manufacturers. But times have changed. Big chunks of production have moved overseas to be closer to markets, take advantage of lower labour costs and protect against the risk of a strong yen.
“Because Japanese companies have left knowledge-driven operations that don’t require big capital expenditures at home, a weak yen does not easily translate into higher exports or capex,” said Naohiko Baba at Goldman Sachs in Tokyo.
Ryutaro Kono at BNP Paribas Japan said Japanese corporations now “value having globally diversified production bases”.
The yen sell-off quickened in mid-March. With Russia’s invasion of Ukraine fueling a rise in energy prices, the Fed and other central banks signalled a more aggressive response to inflation. The BOJ, meanwhile, maintained its stance that the price increases squeezing Japanese homes and businesses would prove temporary.
Japan’s widening trade deficit, a product of its dependence on imported energy and other resources, has helped grease the yen’s decline. Importers need to sell more yen for dollars to pay for these supplies.
Meanwhile, inbound tourism to Japan, which helps improve the country’s trade balance, remains depressed by lingering Covid-19-related restrictions on travel.