FX.co ★ Yen on its knees: how long will the yen set anti-records?

The Japanese currency continues to fly into the abyss, the bottom of which is not yet visible. After yesterday's resounding fall, the yen hit a new 24-year low against the dollar this morning.

At the beginning of Asian trading on Wednesday, the yen dropped to the level of 136.71 against the dollar. The last time the yen traded at this level was in October 1998.

The main reason for such a rapid decline is the growing gap between the yields of Japanese government bonds and US bonds.

Ahead of Federal Reserve Chairman Jerome Powell's 2-day speech to Congress, 10-year US bonds remain above the 3.20% level.

Investors expect Powell to shed light on the Fed's further tactics regarding interest rates: is another increase of 75 bps possible at the July meeting?

Last Wednesday, the US central bank raised rates by 75 bps for the first time since 1994 in order to quickly suppress record high inflation in the country.

Meanwhile, the Bank of Japan remains adamant and continues to follow the dovish route, supporting the economy, which is still fragile after the COVID-19 pandemic, with incentives.

Last week, the Japanese central bank maintained ultra-low interest rates and promised to defend its policy of controlling the yield curve, which effectively limits the yield of 10-year government bonds at 0.25%.

The contrast between the ultra-soft policy of the BOJ and the hawkish course of the Fed has already led to a weakening of the yen against the dollar by 18% this year. Recall that at the end of last year, it was trading at 115.08.

The Japanese currency's depreciation is currently happening in almost all directions, since the BOJ remained the only major central bank that did not announce a tightening of its monetary policy.

The yen fell to 143.6 per euro on Tuesday, having previously tested a 7-year low of 144.25, reached earlier this month.

The European Central Bank is set to raise rates at its July meeting. On Tuesday, ECB chief economist Philip Lane said that the central bank will raise rates by 25 bps next month, but the size of the September increase has yet to be determined.

At the same time, the official does not rule out that in the autumn the European bank may raise rates by 50 bps if inflationary pressure increases by that time.

As the rhetoric of the world's largest central banks becomes more hawkish, the Japanese currency accelerates its decline. And at this stage, analysts do not see any prerequisites for the immediate termination of the sale.

Bearish sentiment towards the yen is intensifying, despite attempts by the Japanese authorities to express their deep concern about what is happening.

Today at the start of the day, speaking to reporters, Deputy Chief Secretary of the Cabinet of Ministers of Japan Seiji Kihara spoke about the latest fall in the exchange rate:

– Currency stability is important, so rapid fluctuations are undesirable.

His comment was in tune with the opinions of some members of the Board of the BOJ. The minutes of the BOJ's April monetary policy meeting were published on Wednesday morning.

The report showed that most officials are concerned about excessive exchange rate volatility, which not only increases uncertainty in the markets, but also harms the economy.

A weak currency inflates the already rising costs of importing fuel and raw materials.

Interestingly, only one of the BOJ commission members noted at the meeting that a weak yen is useful for the Japanese economy.

Given the mood of Japanese officials, some analysts have started betting on currency intervention again.

However, according to the American economist Nouriel Roubini, official intervention will not be enough to stop the fall of the exchange rate.

The most effective way to deploy the yen is to adjust the BOJ policy. The expert believes that the turning point should be the fall of the currency by another 10% from the current level.

Only when the USD/JPY pair reaches 140, the BOJ will capitulate, Roubini is certain. Recall that he is known for predicting the global financial crisis of 2008 back in 2006.