The large interest rate differential between the US and Japan continues to cause the yen to depreciate against the USD, now at its lowest level since 1986.
On June 26, each US dollar was exchanged for 160.8 yen. This is the lowest level of the Japanese currency since 1986. Today, the exchange rate still fluctuates around this mark. Currently, each USD can be exchanged for 160.4 JPY.
The yen has lost 2% of its value against the dollar since the start of the month, and is down 12% year-to-date. The currency remains under pressure from the wide interest rate differential between the United States and Japan.
Short-term interest rates in Japan are currently 0-0.1%. Meanwhile, the US maintains around 5.25-5.5%.
Japan also has the lowest interest rates among the G10 (major industrial economies), making the yen an ideal target for the carry trade, which involves borrowing low-interest-bearing currencies and then selling them to buy higher-interest-bearing currencies. The money can then be saved or invested.
The fact that the yen once again surpassed the important milestone of 160 yen per dollar makes investors think about the possibility of intervention by authorities. In late April and early May, Japan spent 9,790 billion yen (60.94 billion USD) to support the domestic currency when the exchange rate hit a 34-year low, at 160.2 JPY per USD.
In a press conference on June 27, Japanese Finance Minister Shunichi Suzuki signaled his readiness to intervene in the foreign exchange market after yesterday’s developments. “The exchange rate should be stable. One-sided, short-term fluctuations are not what we want. We are especially worried about the impact of this on the economy,” he said.
Analysts say that although the risk of intervention is increasing, Japanese officials may wait until the US releases its inflation report on June 28 before taking action. However, the intervention is likely to have only limited effectiveness.
“I don’t think Japanese authorities can do much. The market has already shown that. Despite statements and actual actions, they still cannot stop the yen from going down,” Dong Chen – strategist said strategist at asset management company Pictet Wealth Management.
