(Bloomberg) — The yen fell to a 24-year low and Japanese bonds tumbled Monday, prompting a warning from the Bank of Japan as its easy monetary policy increasingly feels the strain of rising interest rates globally.
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The currency fell more than 0.5% to 135.19 per dollar, the lowest since Oct. 1998, as Treasury yields extended Friday’s inflation-shock driven gains and the Bank of Japan offered to buy more bonds to cap local equivalents.
That prompted BOJ Governor Haruhiko Kuroda to deliver his clearest warning yet that the impact of rapid slides in the currency are damaging for the economy.
The yen has tumbled almost 15% this year — the worst-performing major currency — as the BOJ keeps rates anchored to boost a sluggish economy while US yields surge on bets for continued Federal Reserve hikes.
Friday’s shock higher-than-expected US inflation print has heaped pressure on the Fed to intensify monetary tightening, boosting the dollar. In sharp contrast, the BOJ looks set to maintain its super-loose stance at its meeting later in the week.
“A recent rapid depreciation of the yen is undesirable and negative for the economy,” Kuroda said in response to questions in parliament. “They increase uncertainties and make it hard for businesses make plans.”
Kuroda’s comments gave the yen some support, dragging it back from the 135 level.
Senior Japanese officials already delivered a ramped-up warning on the yen’s decline Friday, putting their concern in a written statement for the first time as they seek to keep a floor under the currency.
Japan Spells Out Warning on Forex With Yen Near 1998 Low
Kuroda underlined that message Monday, pledging to work closely with the government. The talk of close cooperation has prompted some BOJ watchers to flag the chance of adjustments or tweaks to policy guidance at the conclusion of a meeting on Friday.
With the Federal Reserve expected to deliver at least a half-percentage point rate hike before the BOJ meets, the downward pressure on the yen is set to continue.
The weakening yen is expected to have a mixed impact on the domestic economy, hurting household budgets but providing a boost to exports. A further slide would increase pressure on neighboring Asian economies, which are losing out in export competitiveness.
Yen’s Slump Reaches Levels That Put Asia’s Rebound in Danger
“While Japanese authorities have stepped up warnings, there are few tools available to stop this momentum,” said Akira Moroga, manager of currency products at Aozora Bank in Tokyo. “The environment remains ripe for speculators to drive dollar-yen higher.”
With Japan’s government bond yields under severe upward pressure, the BOJ on Monday ramped up the defense of its policy targets, saying it would buy an additional 500 billion yen ($3.7 billion) worth of 5-year and 10-year bonds on Tuesday.
The move came after the 10-year yield rose above 0.25% for first time since January 2016, the highest since before the central bank introduced a negative rate policy and set a ceiling for the maturity.
“The BOJ will now need to explain clearly what is the logic behind the 0.25% cap and whether that level is appropriate under the current environment,” said Mari Iwashita, chief market economist at Daiwa Securities Co.
The BOJ is unlikely to adjust policy until the yen breaches the 140 level against the dollar, a recent survey of economists by Bloomberg showed.
Why the Yen Is So Weak and What That Means for Japan: QuickTake
The US Treasury’s semiannual report on foreign exchange released Friday may have added to the yen selling pressure, said Yuji Saito, executive director at Credit Agricole CIB’s foreign-exchange department in Tokyo. It suggested currency intervention should only be reserved for exceptional circumstances with prior consultation.
“It essentially rejected Japan intervening for yen weakness that came as a result of widening interest rate differentials because Japan is pursuing an easy monetary policy on its own decision,” Saito said. “Dollar-yen’s uptrend is unlikely to stop until US economy slows down or inflation peaks.”
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