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Why Japan's Yen Is the Weakest in 20 Years and What That Means

Japanese Yen Outpaces Dollar to Hold Currency Crown
Photographer: Akio Kon/Bloomberg
Updated on

The yen has slipped to more than two-decade lows against the dollar largely because Japan has a different view on inflation than its global peers. The Bank of Japan stands out with its commitment to maintain rock-bottom interest rates to revive inflation on a sustainable basis (after years of trying to fend off deflation), even as surging prices in most of the rest of the world spur the US Federal Reserve and other central banks to roll back stimulus and raise rates. A weaker yen can both benefit and harm the economy, businesses and consumers. The steepness of its slide, however, has raised questions about how tenable the BOJ’s policy is and the possibility of government intervention in currency markets.

The biggest reason is the move toward higher interest rates in the US, while Japan’s remain ultralow. That makes dollar-denominated assets more attractive for investors seeking higher returns. The yield on 10-year notes has climbed above 3% -- the highest in years -- as traders continue to bet on an aggressive series of rate hikes from the Federal Reserve. Other factors include the strength of the US economy and its labor market, while Japan continues to lag behind its peers to bring its economy back to its pre-pandemic size. Japan’s trade balance staying in the red is also likely feeding into the weaker yen.