Investing.com – The Japanese yen extended its weakness on Monday, offering little relief after muted signals from the Bank of Japan and rising expectations for higher, longer-term U.S. interest rates pushed the currency closer to levels last seen in 1986
The pair, which determines the number of yen needed to buy one dollar, broke above the 160 level after suffering what analysts called a “flash crash” on Friday. The yen’s weakness came even as Japanese markets were closed for the holidays.
USDJPY rose as much as 1% to a 34-year high of 160.20. It was now close to reaching highs last seen in 1986, when the US threatened Japan with trade sanctions.
The yen’s fall came after the Bank of Japan did not provide any concrete signals on monetary policy and currency market weakness during its meeting on Friday. While the central bank did raise its inflation forecast for the coming years, it also lowered its expectations for economic growth, raising questions about how much the Bank of Japan could potentially tighten monetary policy this year.
In March, the Bank of Japan raised rates for the first time in 17 years, citing an expected rise in inflation amid a sharp rise in wages this year. But this move provided short-term support for the yen.
The significantly softer-than-expected figure, which is a signal for Japan, also raised more questions about the Bank of Japan’s forecast for higher inflation. Data on Friday showed inflation fell below the central bank’s annual rate target of 2% in April.
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But beyond the negative domestic cues, the biggest point of pressure on the yen has been persistent concerns about the wide gap between US and Japanese interest rates.
U.S. data, the Federal Reserve’s preferred gauge of inflation, was hotter than expected for March, adding to bets that the central bank will be in no rush to cut interest rates.
The sharp rise following the PCE data also put pressure on the yen.
The Fed is expected to keep rates unchanged and also provide a hawkish outlook. The central bank is not expected to begin cutting rates until September or the fourth quarter.
Intervention fears do little to stem yen losses
The USDJPY pair has actually broken through levels that traders believe would attract government intervention in the foreign exchange market. 155 was considered the threshold to which the government would allow the yen to weaken, but this turned out not to be the case.
While Japanese officials continue to issue verbal warnings, their lack of action potentially signals limited resources to fully contain the yen’s weakness.
A weaker yen also benefits Japan’s economy, which is heavily dependent on exports.