• Jiji, Bloomberg


The yen has accelerated its downswing against the dollar since the beginning of the year, driven by interest rate differentials between Japan and the United States.

The dollar rose above ¥115.50 to hit the highest levels in about five years in Tokyo trading on Tuesday, the first market day this year. The U.S. currency briefly climbed to ¥116.24 on Wednesday before losing some ground due to purchases of the yen, viewed as a safe haven currency, prompted mainly by stock price drops.

Many currency market watchers forecast that the Japan-U.S. interest rate gaps will keep the yen weak against the dollar for some time.

The yen’s weakening versus the dollar reflect differences in the monetary policies of the Japanese and U.S. central banks.

In the United States, economic activities have restarted after having been under restrictions amid the coronavirus pandemic, while prices have increased, with product and service supplies failing to catch up with demand. The consumer price index for November last year jumped 6.8% from a year before, posting the steepest growth in about 39 years.

The U.S. Federal Reserve has accelerated its tapering campaign in an effort to tame inflation. Minutes of the December meeting of its policymaking Federal Open Market Committee showed on Wednesday that the Fed is inclined to raise interest rates and reduce its balance sheet at a pace faster than it had previously expected.

By contrast, in Japan there is no prospect of a stable price increase coupled with wage growth. The Bank of Japan is widely expected to maintain its large-scale monetary easing, leaving very low interest rates for an extended period of time.

Therefore, funds seeking higher returns have flowed into the United States, causing a wave of dollar buying against the yen.

Still, it is uncertain whether the yen will continue to fall against the dollar straightforwardly.

The Bank of Japan may increase its forecast for inflation to reflect higher material costs when the board meets later this month, the Yomiuri newspaper reported, without saying where it got the information.

The central bank’s outlook for price trends for the fiscal 2022, currently at 0.9%, will be raised to 1% or higher, according to the report. The board is scheduled to hold a policy meeting on Jan. 17 and 18, when it is expected to its review quarterly guidance on prices.

The possible revision is due mainly to the supply-chain disruptions triggered by the COVID-19 pandemic, the paper said. Energy prices to produce and ship food, and gas and raw materials are rising, while import costs have also been hit the recent weakness in the Japanese currency.

The BOJ said the yen’s recent weakness has large positive effects for Japan as it helps boost exports and corporate earnings from overseas operations. Before such benefits bring about pay hikes, however, the stronger dollar has started squeezing family finances through rises in gasoline and food prices.

Some currency market participants speculate that if the dollar advances to around ¥120, government and ruling party officials will start warning against a further rise of the U.S. currency in the run-up to the election for the House of Councillors, the upper chamber of Japan’s parliament, this summer.

Akira Moroga, chief market strategist of Aozora Bank, said the dollar is expected to remain on the current uptrend in the first half of this year and may reach around ¥119. He predicted that the dollar’s ascent will then come into a lull as inflation concerns in the United States are expected to be mitigated in line with the resolution of supply constraints.

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