Yen falls to weakest level against dollar since 1986 amid rate gap

The Japanese currency slipped to a nearly four-decade low against the US dollar as wide interest rate differentials continued to encourage capital outflows from Japan

The yen fell to its weakest level against the US dollar since 1986, a milestone likely to generate unease in Japan and put traders on high alert for possible intervention by the authorities.

 

The currency depreciated 0.2 per cent to touch 161.98 against the dollar in New York trading overnight, breaching the 161.95 level reached in July 2024 during an earlier campaign by Japan to support the exchange rate. It extended its decline to 162.33 at 10:55 am in Tokyo on Tuesday.

 

The last time the yen traded at this level, it was moving in the opposite direction, midway through a massive, years-long rally that followed a currency accord engineered by the United States. This time, the yen is weakening, even as Japan emerges from an economic slowdown that lasted for a generation. The weaker currency is boosting exporters' profits and helping the country's stock market reach record highs.

 

 

However, import costs are rising, particularly for oil and gas shipments priced in dollars. The resulting inflation is hurting consumers, who are paying more for everything from food to electricity, and threatening to undermine the popularity of Prime Minister Sanae Takaichi's government.

 

The yen's slide has continued despite the Bank of Japan's (BoJ's) policy shift. The central bank ended its negative interest rate policy in 2024, raising expectations of a currency revival.

 

The BoJ raised its benchmark interest rate to 1 per cent on June 16, the highest level since 1995. However, the impact was limited as traders expect the US Federal Reserve to maintain a hawkish stance. As long as the gap between Japan's interest rates and those in the US and other major economies remains wide, investors have an incentive to borrow cheaply in yen and invest in higher-yielding overseas assets. The resulting capital outflows continue to put downward pressure on the Japanese currency.