According to most economists, the Japanese yen is expected to continue declining against the US dollar throughout the year. Recent reports indicate that analysts expect the currency to fall in the fourth quarter of the year as well, highlighting the consequences of the dovish stance of the Bank of Japan. It remains the only central bank in the world that is still clinging to an easy monetary policy, despite the market conditions.
The BOJ and its Impact
The Bank of Japan has stuck to its stimulus, as it continues to buy bonds for defending the yield cap, while the US Federal Reserve, which has already been very aggressive in terms of monetary policy tightening, is scheduled for yet another rate hike of 75 basis points on Wednesday.
Policymakers are becoming troubled with the resulting weakness in the Japanese currency because it drives up living costs and can affect household budgets. This is already a problem, considering that global inflation is on the rise, which offsets the boost exporters get from a cheaper currency.
The yen has already shed 14% against the US dollar so far in the year and on Wednesday, it briefly dropped to as low as 135.58. This is the lowest the currency has been since 1998, which had been a time for global financial problems because of a debt default by Russia.
In fact, the drop in the Japanese currency has been so steep that it has pushed the central bank and the government to make a rare statement about its fall, which they did on Friday. Market economists said that the currency would continue to remain week, as long-term Treasury yields continue to rise and the Fed hikes up the interest rate.
Future Yen Prospects
Economists further added that the expected further decline in the yen until the last quarter of the year. In fact, some of them went as far as to say that even the first half of next year could be a troubling one for the yen. Not many believe that things will improve for the currency in the next quarter, as the Bank of Japan has no intention of changing its policy any time soon.
The best way for the Japanese government to prevent further weakening in the currency is to open their borders and allow tourists to come in. In addition, the Bank of Japan (BOJ) would also have to make changes to its monetary policy in order to see results. Allowing in more foreign travelers would boost the demand for the yen.
The country had previously imposed a ban on all non-residents to enter the country because of COVID-19, but has started accepting chaperoned tour from this month. The Bank of Japan is expected to continue with its ultra-loose monetary policy in its next rate review, which will conclude on Friday. Most analysts believe that no policy adjustments would be made until next year.
The current quarter’s forecast for economic expansion was 4.1%, less than the 4.5% projected earlier.