The Japanese yen plunged by the most since March 2020 against the U.S. dollar as the Bank of Japan eased monetary policy aggressively, diverging further from the Federal Reserve's increasingly hawkish stance.
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The yen fell by 2.4% to 125.09 against the dollar on Monday, the lowest since August 2015 and the lowest since August 2015. The BOJ offered for the first time to buy 10 year government bonds over the next three days, capping yields amid a global debt sell-off and eroding the currency's appeal. The Fed raised interest rates for the first time since 2018 and indicated that more tightening would follow to curb soaring inflation.
Governor Haruhiko Kuroda's commitment to continue with the stimulus has pushed the spread between the U.S. and Japanese benchmark yields to the widest since 2019. The yen is down more than 7% against the dollar this year, which is the most among major peers, and analyst says that the widening interest-rate differential is going to weaken the currency further.
John Hardy, head of the FX strategy at Saxo Bank A S, said that the pressure on the JPY will continue as long as the global yields continue to rise and the Bank of Japan pledges unlimited support for its bond market. The spread between the U.S. and Japanese benchmark yields has jumped by around 70 basis points this year to 2.25%. The investors are bracing for further losses in the near-term. Since 2015, one-month risk reversals, a measure of positioning in the options market, are the most bearish on the yen.
Japan has been exposed to higher oil prices as a net importer, which means that the yen has lost some of its luster as a haven and hasn't been able to capitalize on the risk aversion from the war in Ukraine. It has had a poor performance against commodity producing nations, which has exacerbated its poor performance.
Lee Hardman, a currency analyst at MUFG, said that the recent improvement in global investor risk sentiment, higher yields outside Japan and continued upward pressure on commodity prices is a potent mix for yen weakness in the near-term.
Markets are speculating on the policy implications of the yen moves, with economists at JPMorgan Chase Co saying it could prompt the BOJ to change its yield curve control framework, which aims to cap the 10 year yield on government bonds.
Governor Kuroda said last week that stable inflation was needed to trigger policy change at the central bank, not yen weakness. The Japanese Chief Cabinet Secretary Hirokazu Matsuno said on Monday that the government is paying close attention to trends in foreign exchange markets, including the recent depreciation of the yen.
The rapid collapse of the yen we have been observing since the beginning of March is likely to have been too rapid for the taste of the BOJ, said Ulrich Leuchtmann, head of currency research at Commerzbank AG. We must not forget that the BOJ should really be in favor of a weak yen. None of the wealthiest Russians in Silicon Valley distancing themselves from Putin is carefully — Very Carefully — Distancing himself.