The Japanese yen is at risk of passing the psychological barrier of 160 per dollar as markets prepare for the country’s central bank to intervene in an effect to prop up the currency, as it has in the past.
Weaker than expected inflation numbers last week have pushed the yen to its cheapest since 1989, after a measure of inflation that strips out fresh food and energy, came in at 2.1 per cent in May in a ninth consecutive month of cooling.
Meanwhile, services prices, highlighted by Japan’s central bank as a key measure when making policy decisions, fell from 1.7 per cent to just 1.6 per cent.
The yen currently sits at 159.49 per dollar, and has not passed that point in decades other than briefly this April, before government intervention stabilised the currency.
While Japan is expected to intervene again, as they are thought to have done in April, verbal threats from the government yesterday have only managed to steady the currency over the last few hours.
“If there are excessive currency fluctuations, it has a negative impact on the national economy,” said top currency diplomat Masato Kanda. “In the event of excessive moves based on speculation, we are prepared to take appropriate action.”
“There is going to be intense focus on whether the Bank of Japan intervenes in the coming days, otherwise the market may test fresh record highs for this pair,” added Kathleen Brooks, research director at XTB.
“This week we will get Japanese retail sales and Tokyo CPI for June. The yen is reacting to Japanese domestic economic data, so this is worth watching closely.”
In the last year, Japan has become seen as an attractive investment opportunity in the West, with the country’s main index, the Nikkei 225, hitting an all time higher earlier this year.
However, while the Nikkei is up 16.6 per cent since the start of the year, it has fallen five per cent since its peak in March, and the country’s inflation problem seems to be continually threatening the goodwill it has received from international investors.
Nigel Green of deVere Group warned that the movement in the yen was also causing “ripples across emerging markets, placing increasing stress on Asian currencies”.
“These currencies are under pressure to depreciate to maintain their export competitiveness, which in turn affects the stability and growth prospects of these economies,” he explained.
“As the yen weakens, countries like South Korea, Malaysia, and Thailand might feel compelled to let their currencies depreciate to protect their export markets. This could lead to a cycle of competitive devaluations, destabilising regional economies.”
The country’s central bank has been in a tug of war with the yen, as it attempts to prevent it weakening and also break Japan from decades of disinflation.
This means it is reluctant to increase interest rates that , even as minutes from the bank’s June meeting showed it had debated a near-term interest rate hike.
Rather than hiking rates, it has instead chose to pursue a policy of intervening directly in the currency market, despite criticism.
“Perhaps if the Bank of Japan got on with things it wouldn’t require direction intervention in the FX markets to prop up the yen – it never works for very long anyway,” said Neil Wilson, chief market analyst at Finalto.
“Efforts to prop up the yen are not only expensive but potentially ineffective,” added Green.