The Japanese yen extended losses against the US dollar after Donald Trump’s re-election as US president, falling below 155 yen for the first time since July. This decline reflects continued pressure on the Japanese currency and increases the likelihood of the Bank of Japan intervening to halt the decline.
The yen fell 0.4% to 155.15 against the dollar, at a time when markets are witnessing tensions over Trump’s economic policy, which could put additional pressure on the yen. Continued weakness in the yen fuels speculation that the Bank of Japan may be forced to raise interest rates faster than expected, as traders are monitoring a 50% probability of a rate hike at its December policy meeting.
Part of the pressure on the yen is due to higher yields on US bonds, with the yield on two-year bonds reaching its highest level since July, making the dollar more attractive to investors compared to the yen.
On the other hand, Trump’s victory adds to increased concerns about the expansionary and inflationary economic policies he may pursue in his second term. Some believe that these policies may make the US Federal Reserve less willing to cut interest rates, strengthening the dollar and increasing pressure on the yen.
These tensions open up questions about how quickly the Bank of Japan will take measures to raise interest rates in order to reduce the gap between interest rates in the United States and Japan, which could lead to support the Japanese currency.
Markets are watching the situation closely, especially as the yen has reached levels close to those that the Japanese government has intervened in the past to support it.
Factors affecting the value of the Japanese yen
The value of the Japanese yen is influenced by a number of global economic and financial factors that affect the purchasing power of the currency and market trends. The interaction of these factors together is what determines the overall direction of the Japanese yen in the exchange markets.
One of the most prominent of these factors is the monetary policy of the Bank of Japan, which makes decisions on interest rates and quantitative easing, which directly affects the attractiveness of the yen to investors. When the Bank of Japan pursues an accommodative monetary policy, such as keeping interest rates low or applying quantitative easing, the yen weakens as investors seek higher returns in other markets.
Also, interest rates in major economies such as the United States are factors that significantly affect the value of the yen. When the US Federal Reserve raises interest rates, the yield on the dollar increases, strengthening the dollar against the yen.
High yields on US bonds make the dollar more attractive compared to the Japanese yen, leading to the latter’s depreciation. On the other hand, if interest on the dollar is low, investors prefer to turn to the safe-haven Japanese yen in the Periods of economic instability.
In addition, Japan’s overall economic situation plays a large role in determining the value of the yen. Lower economic growth in Japan, or lower industrial production or domestic demand, could significantly weaken the yen, as investors see the Japanese economy as facing economic challenges that may negatively affect the currency.
In contrast, sustained economic growth in Japan strengthens the yen. Geopolitical factors also indirectly affect the value of the Japanese yen.
The impact of yen’s decline on Japanese economy
The depreciation of the Japanese yen has significant effects on the Japanese economy, as it can affect many economic aspects. Initially, a weak yen is a catalyst in boosting Japanese exports. When the yen depreciates against other currencies, Japanese goods become cheaper for foreign buyers, making them more competitive in global markets.
This can lead to increased demand for Japanese products, especially in export-dependent sectors such as automobiles and electronics. Hence, it can contribute to in increasing profits for exporting companies, which promotes economic growth. On the other hand, a weaker yen is also increasing the cost of Japan’s imports, especially in commodities such as oil and energy.
Since Japan is one of the largest importers of oil, the yen’s decline makes oil import costs high, raising fuel and energy prices in the domestic market. This can lead to increased production costs in many local industries, and negatively affect companies that rely on imported raw materials.
In addition, the weaker yen is putting pressure on inflation in Japan. Although the Bank of Japan generally seeks to increase inflation to reach its 2% target, a sudden increase in import costs could lead to unwanted inflation, affecting consumers’ purchasing power.
Increasing the prices of imported goods could reduce consumer spending, hurting domestic economic growth. Moreover, a weaker yen could increase pressure on the Bank of Japan’s monetary policy. If the yen’s weakness persists for a long time, the Bank of Japan may have to intervene in the markets by buying the yen to support it, or even consider raising interest rates to stop the currency from falling.
