Investing.com — The Japanese yen weakened further on Monday, with little relief following mediocre signals from the Bank of Japan and increased expectations of longer US interest rates, pushing the currency close to levels last seen in 1986 seen.
The pair, which fixes the number of yen needed to buy one dollar, blew past the 160 level after seeing what analysts described as a “flash crash” on Friday. The yen’s weakness came even as Japanese markets were closed for a holiday.
The USDJPY pair rose as much as 1% to a 34-year high at 160.20. It was now close to reaching a high last seen in 1986, when the US had threatened Japan with trade sanctions.
The yen’s decline came after the BOJ failed to provide concrete signals on monetary policy and currency market weakness at a meeting on Friday. While the central bank has raised its inflation outlook for the coming years, it has also lowered its expectations for economic growth, raising questions about the extent to which the BOJ could potentially tighten monetary policy this year.
The BOJ had raised interest rates for the first time in 17 years in March, citing an expected rise in inflation due to huge wage increases this year. But this move provided temporary support for the yen.
Substantially weaker-than-expected inflation, which serves as a bellwether for Japan, also raised more questions about the BOJ’s forecast for higher inflation. Data on Friday showed inflation fell below the central bank’s annual target of 2% in April.
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But besides negative domestic signals, the biggest point of pressure on the yen was ongoing concerns about a wide gap between US and Japanese interest rates.
US data – the Federal Reserve’s favorite inflation gauge – is higher than expected for March, adding to expectations that the central bank will be in no hurry to cut interest rates.
The price shot up after the PCE data, which also put pressure on the yen.
It is widely expected that the Fed will leave rates unchanged and will also present an aggressive outlook. The central bank is not expected to start cutting interest rates until September, or the fourth quarter.
Fear of interventions does little to stem the losses in the yen
The USDJPY pair effectively rose past levels that traders thought would attract government intervention in the foreign exchange market. 155 was considered the threshold at which the government would allow the yen to weaken, but this turned out not to be the case.
Although Japanese officials have continued to issue verbal warnings, a lack of action on their part may indicate limited resources to fully counter yen weakness.
A weaker yen also benefits the Japanese economy, which is highly dependent on exports.
