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Why the Yen Is So Weak and What That Means for Japan

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The yen has weakened beyond 140 per dollar for the first time in almost a quarter century, mainly because Japan’s central bank is keeping interest rates at rock-bottom levels while the Federal Reserve and other central banks are conducting outsized rate hikes. Price growth in Japan is much cooler than in the US, and the Bank of Japan believes it needs to do more to cement inflation in the minds of consumers and businesses after years of deflation. The yen’s historic slide has both benefited and harmed the economy, businesses and consumers. The steepness of its fall raises questions over whether policy makers need to curb its decline through currency intervention or a change in BOJ policy.

The biggest reason is the US move toward higher interest rates, while Japanese rates remain low, making dollar-denominated assets more attractive for investors. Yields on Treasuries have climbed as traders bet the Fed will continue to raise rates aggressively, while the BOJ keeps a 0.25% cap on Japan’s 10-year government bond yield. Japan’s economic recovery remains relatively moderate and its ongoing trade deficit is also reinforcing downward pressure on the yen.