Japanese Yen Falls to 34-Year Low as BOJ Maintains Low Rates

Japanese Finance Minister Shunichi Suzuki's announcement on Friday caused the yen to tumble below 156 to the dollar, the lowest since 1990. 

• The Bank of Japan (BOJ) is concerned about the decrease in the yen and is giving speculators a fresh warning. 

   

• The currency fell to a 34-year low after the central bank decided to hold rates steady. 

This freefall to a new 34-year low came after the Bank BOJ decided to maintain its short-term interest rate target of 0%- 0.1%, a move that did not hint at any immediate action to salvage the currency’s value. 

Shunichi Suzuki, the Finance Minister of Japan, didn’t help quell doubts regarding the adverse effects of the yen’s ongoing decrease when he approached the matter cautiously on Friday, 26th April, aiming at currency speculators. 

Surprisingly, the BOJ did not signal any future rate hikes or plans to scale back its massive bond-buying program (YCC). This decision came despite a lower-than-expected inflation data for April, which showed core inflation at 1.6% versus the forecasted 2.2%. 

The BOJ has long wanted to exit its QQE program, citing its notable drawbacks. 

Market's Reaction to the BOJ Policy Announcement

On Friday, April 26, the Japanese yen weakened to 160 against the U.S. dollar for the first time in 34 years. Interestingly, just 2.5 hours later, the USD/JPY pair crashed sharply from around 160.20 to the 155.00 area, a staggering 3% swing in just a few hours. 

This sudden, massive move has raised doubts about potential intervention by authorities, especially just days after the BOJ left interest rates unchanged. 

As usual, similar to last time, this happened while markets in Japan were closed for a holiday. If the BOJ did intervene, they would have to conclude it by today so that it wouldn't affect the Nikkei stocks much.

Not just the USD/JPY pair, the Yen has hit multi-year lows against several other major currencies, including the Euro, Australian Dollar, New Zealand Dollar, and British Pound Sterling.

Source: Glassnode

However, from a technical analysis perspective, on higher time frames, USD/JPY already broke through a critical resistance area but failed to hold above the level of 158.600 before plunging back to its previous level. 

The pair currently trades above 156.00, up 0.33% on the day. Technically, we may see some consolidation and a minor pullback in this zone before the subsequent rise, targeting 158.60. The overall momentum and price structure for USD/JPY still appear bullish. 

What to watch out for: Investors should closely monitor upcoming U.S. data releases this week, as they could directly impact the yen's movements. The yen is weakening, leading most major currency pairs to rise. 

Investors are now focusing on a possible monetary policy tightening by the Bank of Japan as soon as July, conditional on positive signals such as improved services inflation and real wage growth that can drive consumption. 

The U.S., Japan, and South Korea Discuss the High inflation of Yen and Won

The yen and won depreciation was debated on April 17th by the leading financial officials of the U.S., Japan, and Korea. 

On the sidelines of the International Monetary Fund and G20 meetings in Washington, Janet Yellen, the US Treasury Secretary, Shunichi Suzuki, the Japanese Finance Minister, and Choi Sang-mok, the South Korean Finance Minister, held a meeting where they pledged to increase the level of dialogues concerning rate fluctuations.

After the Bank of Japan's historic financial policy shift in March last year, which registered interest rates rising for the first time in twenty years, the yen has not stabilised. This was a major shift from negative rates, with Japan heading out of long-lasting deflation.

Recent reports from the Bank of Japan predict core consumer inflation at 2.8% for the FY ending March 2025, then at the target of 2% the following year. 

However, the most recent data from Tokyo show a softening of consumer inflation, which fell to 1.6% in April from 2.4% in March, highlighting the persistent difficulties in stabilising the economy.

Will the Japanese Yen Make a Comeback?

The current economic conditions hinder the BOJ's policy normalisation plans. The central bank has revised its inflation forecast for 2024, projecting it to be between 2.5% and 3%, but has lowered its GDP growth projection to 0.7% to 1%.

Therefore, the BOJ finds itself in a challenging position. If it raises interest rates or reduces its bond purchases (quantitative tightening), it could help strengthen the yen, but this would hurt exports and tourism, which have benefited from a weaker currency.

 Higher rates could also weaken domestic consumption further and slow inflation. 

On the other hand, if the BOJ continues its ultra-loose policy, it would provide continued support for exports and tourism via a weaker yen but also risk increasing inflation by higher import costs due to Japan's heavy reliance on imported oil. 

Domestic consumption remains uncertain as higher energy costs may eat up wage growth. Plus, a persistently weak yen raises the price of imports.

Before the Bank of Japan issued its statement, Suzuki repeated the threat of speculative trading in the yen. His remarks raised tension among traders, who stayed vigilant for any evidence of efforts by Tokyo to prop up the currency.

"The weak yen has both positive and negative impacts (on the economy)," Suzuki said, adding that he is "more concerned about the negative effects right now."