The Japanese yen blew through ¥135 to the U.S. dollar in morning Asian trade on Monday, taking the currency to its lowest levels in a quarter of a century.
The yen reached a peak of ¥135.20 to the greenback. The Japanese currency has now lost 17.5% of its value so far this year, hitting its lowest levels since 1998, when Japan's asset-bubble burst.
The performance in 2022 outdoes previous periods of weakness in 2002 and 2015, when the yen hit ¥134 to the dollar but never broke above a ¥135 resistance level. And there's no sign that it's about to stop.
The top brass in Tokyo have generally expressed "concern" about yen weakness, without doing anything about it. And Japan's chief cabinet secretary, Hirokazu Matsuno, stuck true to form in a press conference.
"It's important that currency rates move in a stable way, reflecting fundamentals. But there have recently been sharp yen declines, which we are concerned about," Matsuno, the spokesman for the Japanese cabinet, said at a press conference on Monday.
"We are ready to respond appropriately as needed, while communicating closely with each country's currency authorities," he added, dodging a question about whether the government would intervene.
Japan typically sees the benefit of having a relatively weak currency, but there is been mounting doubt about the damage that these sudden moves this year could do. A weak yen makes the goods of Japanese manufacturers cheaper when they are exported overseas, and enhances profits made in markets such as the United States if they are repatriated back home.
But a weak currency forces up the cost of any imported components or goods. An increasing proportion of Japanese companies make some or all of their products in cheaper overseas markets, even if the goods or parts are ultimately shipped back to Japan. Japan also imports all its oil, a particular concern since petroleum prices are soaring at the same time that the yen's buying power is going down. Lastly, rapidly moving currencies make it hard for companies to price goods and services.
The currency pressure would be positive for Japan if it forces companies to raise wages, a move they have long resisted. It has already forced some companies to raise the price of their consumer goods, never a popular move on the High Street, but a necessary one if Japan is to exit deflation. Both Japanese consumers and companies have been "taught," by years of painful experience over two economic "Lost Decades," to hoard cash rather than invest and to defer spending. Building a factory or buying a fridge would always be cheaper next year.
Japanese central bank governor Haruhiko Kuroda was last week forced to apologize for comments in which he implied that it was positive that consumers are increasingly willing to accept higher prices.
Being forced to save during the pandemic may have "led to improvements in consumers' tolerance for price increases," Kuroda said in a speech. He was responding to a University of Tokyo survey where more than half the respondents said they would not stop buying a product that they regularly purchase if the price went up 10%.
He's right, of course. It would be positive for the economy if Japanese consumers and companies feel a little pressure to spend instead of save. But he sounded insensitive, and politicians saw an opportunity to grandstand against the administration as an entitled, wealthy elite. Kuroda retracted the remark and told parliament it was "utterly inappropriate" to say people are voluntarily paying higher prices.
Kuroda clarified that prices should only go up if wages are rising and the economy is growing.
Japan has long looked to stimulate inflation, and is still struggling to hit its targeted 2% inflation rate. That leaves it with hyper-accommodative monetary policy, whereas the U.S. Federal Reserve is aggressively raising interest rates to beat back soaring inflation. The yen's decline has been particularly pronounced against the U.S. dollar. It has declined 7.6% against the euro so far this year.
The Bank of Japan will be meeting on Thursday and Friday. But there's little change expected in its approach. It is likely that the BOJ will become the only major central bank to maintain an accommodative stance and resist raising rates. It will therefore continue to have the world's worst-performing major currency.
"Japan is absolutely not in a situation that warrants monetary tightening, as the economy is still in the midst of recovering from the pandemic's impact," Kuroda said last week. When it comes to the currency, "as long as the moves are stable and not very sharp, a weak yen in general is likely to have a positive impact on Japan's economy," he added.
Japan hasn't intervened in currency markets since 2011. A Bloomberg survey suggests there's tolerance for a move to ¥140 before the Bank of Japan would consider interfering. That laissez-faire policy was given credence by the U.S. Treasury Department's semiannual report to Congress on foreign-exchange policy and trade, which it delivered on Friday.
Japan is transparent on its yen interventions and isn't at that stage, the U.S. Treasury concludes. "Treasury's firm expectation is that in large, freely traded exchange markets, intervention should be reserved only for very exceptional circumstances with appropriate prior consultations," the report states.
The yen's moves against the U.S. dollar have been particularly sharp since the United States starting raising interest rates in March. So even out in Asia, investors will also have one eye on the two-day meeting of the U.S. Federal Reserve that starts Tuesday.
The market is currently pricing in a 50-basis-point rise in U.S. interest rates for both the June and July meetings, so a 75-point hike would be a nasty surprise. There's sure to be close scrutiny given to comments from Fed chair Jerome Powell, for any indications of a faster pace of rate hikes, particularly at the meetings in September, November and December.
Friday's U.S. inflation figures, with an 8.6% rise year-on-year in May, again bolstered a more-hawkish position, the third straight month of 8%+ price increases. That sent U.S. consumer confidence to its lowest level since records began in 1952. High gas prices and high inflation saw the University of Michigan Consumer Confidence fall to 50.2, down from 58.4, and significantly worse than expected. Among respondents, 46% cited inflation as the biggest reason for their gloomy outlook, up from 38% last month.
It's been a bloodbath on Asian markets on Monday, following through on Friday's heavy selling on Wall Street after the inflation data. Amid a sea of red, the 2.2% decline in the Topix index on the Tokyo Stock Exchange is par for the course, with the Hang Seng Index in Hong Kong down 3.4%, Singapore off 1.2%, and the South Korean market facing a 3.5% fall.