In this post:
- The yen has suffered its worst week in months and has been losing versus the dollar for six days in a row. Everyone is waiting to see what the Bank of Japan does next.
- Despite Japan’s high inflation and rising salaries, the Bank of Japan doesn’t appear to be in a rush to raise interest rates. The yen is suffering as a result of the unhappiness of traders.
- Stocks fell, cryptocurrency collapsed, and mayhem erupted everywhere when the Bank of Japan last hiked interest rates in August.
The value of the Japanese yen is declining. As of December 14, 2024, it has lost six days in a row versus the US dollar, dropping to 153.48 per dollar. This is the yen’s longest losing run since June and its weakest week in more than two months.
At its meeting on December 18–19, the market is placing strong bets that the Bank of Japan (BoJ) will maintain its ultra-loose monetary policy, opting for stability over rate hikes.
Japan’s monetary policy is turning into a risky move. October’s record-breaking salary increases—the greatest in 32 years—are driving inflation over the BoJ’s 2% objective. However, the BoJ appears cautious, even hesitant, rather than taking a daring step to tighten policy.
It doesn’t impress traders. The yen has been dumped in favor of the stronger dollar, pushed higher by US Treasury yields and a Federal Reserve that isn’t afraid to flex its muscles.
BoJ’s caution fuels yen selloff
The BoJ’s hesitation is clear. Inflation is rising, wages are climbing, but rates? They’re stuck. October’s wage growth should’ve been a wake-up call: base salaries jumped at a pace unseen in decades, stoking inflationary fires. But the BoJ isn’t rushing.They’ve hinted that economic recovery is fragile, and any aggressive tightening could kill momentum. That caution has made the yen a sitting duck.
Traders of currency are brutal.According to Bloomberg, selling pressure is increasing as the yen is in its sharpest decline since the middle of the year. The statistics are dismal.
Japan’s economic development is also sluggish.It has been supported by government stimulus and salary increases, but not enough to lead to significant changes in policy.Even if the BoJ maintains its dovish attitude, many anticipate that the yen will continue to decline.The mood of the market is clear: the yen will continue to be a punching bag unless Japan takes action.
Markets are still plagued by August’s shock rate increase
August was the last time Japan caused a stir.Interest rates were raised to 0.25% on July 31 by the BoJ, which was the first rate increase in 17 years. Markets were taken by surprise by the decision. In June, inflation was 3.2% forcing the BoJ to break a decades-long policy of ultra-low rates. But the fallout was brutal.
Within days, the Nikkei 225 crashed nearly 20%. On August 5, it recorded its worst single-day drop since Black Monday in 1987, shedding 12.4%, or over 4,400 points. The panic didn’t stay in Japan. It spread like wildfire.
The S&P 500 plunged 6%, the Nasdaq lost 7.5%, and Europe’s DAX and CAC 40 tanked by 5% and 4.8%, respectively. The BoJ’s decision sent shockwaves through global markets, shaking confidence in equities and assets everywhere.
Crypto also wasn’t exempt.In just one week, Bitcoin lost 27% of its value as it plummeted below $50,000. Ethereum fell 34%.As the panic grew, leveraged cryptocurrency holdings worth over $600 million were liquidated.
The infamous yen carry trade, in which traders borrowed cheap yen to finance dangerous wagers, caused turmoil as traders frantically tried to unwind their holdings. Investors came to understand that even Japan, the archetypal example of low interest rates, was vulnerable to the effects of inflation.
And now that this has happened, people are starting to worry a bit more. Although a weaker yen lowers the cost of Japanese exports, it also makes imports more costly, which exacerbates inflation.
And we’ll definitely be headed for a replay of August 5 once it rises high enough.
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