The yen dropped to its lowest level against the dollar in more than 12 years on Thursday, powered by expectations that the United States will hike interest rates this year and the Bank of Japan will crank up monetary easing.
The currency briefly touched ¥124.30 in Tokyo midday trading, its lowest since late 2002, and returned to the level later in the day.
Investors have been in an upbeat mood as equities surge, with the benchmark Nikkei 225 index closing Thursday at 20,551.46, up 0.39 percent, in its longest rally since 1988.
“It’s likely that the yen will continue to slowly weaken and we’ll have a global risk-on mode,” said Mitsushige Akino, executive officer at Ichiyoshi Asset Management. “The U.S. economy is OK and as (Federal Reserve Chair Janet) Yellen said recently, the U.S. is trying to raise rates.”
The dollar is resuming its bull run against the yen on growing expectations that the Federal Reserve will hike interest rates by the end of the year, while the BOJ is tipped to launch more stimulus to stimulate the stagnant Japanese economy and prevent deflation’s return.
The chances of a rate hike, which tends to boost demand for dollar-denominated assets, have increased following positive U.S. data earlier this week and comments from Yellen on Friday that rates would go up “at some point this year.”
“The market is getting an inkling that the data in the U.S. will start to get stronger,” Claudio Piron, a Bank of America strategist, told Bloomberg News.
“The trend will be your friend in terms of a higher dollar,” Piron said.
The yen has lost about half its value against the dollar since Prime Minister Shinzo Abe swept to power in late 2012 on a ticket to revive the country’s long tepid economy.
A huge monetary easing plan from the BOJ, launched just over two years ago, has been a cornerstone of the growth push and helped push down the Japanese currency from around ¥80 to the dollar when Abe took over.
But concerns are mounting over the negative effects of the yen’s unrelenting dive on households across the nation facing price increased caused by companies seeking to pass on the resulting higher costs for importing materials.
While the weakening of the yen is benefitting export-oriented companies such as automakers, it is also driving up the prices of imported goods and materials. To pass the inflated costs on to consumers, many food makers have decided to hike prices.
Earlier this month, lactic drink maker Yakult Honsha Co. said it will increase the price of its Joie yogurt drinks in June for the first time in 23 years due to higher prices for domestic raw milk and rising foreign procurement costs.
Meiji Co., a unit of Meiji Holdings Co. , has decided to mark up some of its chocolate products in July as prices for cocoa beans and other ingredients soar.
In the restaurant industry, Mos Food Services Inc., the operator of the Mos Burger hamburger chain, and Burger King Japan have raised the prices of their mainstay menu items.
The food industry “is having a headache from persistent surges in food materials,” MOS Food President Atsushi Sakurada said.
The weakening of the yen has helped boost retail gasoline prices in Japan. Prices on average have climbed for five weeks straight, reversing a downtrend that reflected a drop in crude oil prices.
Nippon Paper Industries Co. has no immediate plans to increase prices again after conducting a series of markups across the industry early this year, mainly due to higher prices for imported wood chips, according to industry sources.
Still, paper-pulp makers are closely watching whether the yen will continue its decline, the sources added.
Japan Association of Corporate Executives (Keizai Doyukai) Chairman Yoshimitsu Kobayashi says that the yen’s drop is not necessarily good for small companies, which tend to struggle to pass on higher materials costs to their clients.
“Some are particularly vulnerable to the yen’s weakening,” said Japan Chamber of Commerce and Industry Chairman Akio Mimura, expressing concerns about any further weakening of the currency.