Weakened yen reflects a lopsided world economy
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Look out below: The yen is hovering near its weakest level in almost 40 years, reflecting an increasingly lopsided global economy, where capital keeps flowing to the U.S.
Why it matters: The yen is being squeezed by both long-term and short-term forces.
- Higher interest rates in the U.S. continue to draw investors to dollar-denominated assets, while Japan remains stuck with relatively low borrowing costs.
- The Iran war has pushed up oil prices, a blow to an energy-importing economy like Japan that adds to the downward pressure on the currency.
What they're saying: "Rising oil prices, the prospect of U.S. rate hikes and stimulatory fiscal and monetary policy conditions in Japan [are] fueling the trend — one that's unlikely to end without a material course correction from Japanese authorities," Kyle Rodda, a market analyst at Capital.com, wrote in a note Wednesday morning.
The intrigue: Japanese officials have said they are prepared to support the currency, as they did earlier this year.
- But intervention has provided only temporary relief because it doesn't address the underlying driver: the wide gap in interest rates between Japan and the U.S.
What to watch: The Bank of Japan, which will announce a policy decision next week, can't easily solve the problem.
- The central bank is reportedly willing to raise rates more quickly than economists expect, with the decline in the yen adding to inflationary pressures, Bloomberg reported Wednesday morning.
- The risk is that higher rates could choke off a still-fragile economy and increase borrowing costs for one of the world's most indebted governments.
The bottom line: It has been more than 40 years since dollar-yen tensions became so politically fraught that they culminated in the Plaza Accord.
- Today's pressures are different, though the yen's slide is a reminder that widening global imbalances have a way of forcing policymakers' hands.
- There is a bonus, however: Your dollars currently go a lot further in Tokyo.
