Yen set for worst year on record as traders eye intervention, while US dollar continues to climb

TOKYO – The yen has slumped to a level that puts it on track for its worst year on record, putting traders on alert for at least more verbal intervention from Japanese officials.

The currency has slumped more than 19 per cent this year, and edged past its previous worst annual drawdown in 1979. The renewed selloff in Treasuries this month has widened the yield gap between the US and Japan, driving up the dollar and pushing the yen to a 24-year low.

Dollar-yen surged past the 143 level for the first time since 1998 Tuesday, a move which will ramp up pressure on Bank of Japan Governor Haruhiko Kuroda’s defiance of a global shift toward rate hikes and the strength of Prime Minister Fumio Kishida’s support for his stance.

It traded around the 143.03 level in early trading Wednesday.

The yen has been slipping against the Singapore dollar as well, trading at 101.78 per Singdollar on Wednesday morning.

In June, officials said they would take action if necessary, without specifying what that would be, after a three-party meeting held between the Ministry of Finance, the central bank and the Financial Services Agency.

Japan last intervened to prop up the currency in 1998, at around the same time much of Asia was being buffeted by a regional financial crisis.

Developed economies are also taking a hit from the dollar’s appreciation to multi-decade highs in ways that were once more familiar to their emerging market peers.

Fueled by the US Federal Reserve’s most aggressive tightening cycle in more than a generation, the stronger greenback is pushing rival currencies lower, driving up the cost of imported goods, constricting financial conditions and feeding inflation in other economies.

“A stronger dollar generally comes with higher short and long-term interest rates in the U.S., or with stress in global markets and a flight to the dollar’s perceived safety,” said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics. “Those tighter financial conditions cause developed economies everywhere to slow.”

The Fed’s trade-weighted dollar index versus advanced economies has soared 10 per cent this year to the strongest since 2002, while the emerging-markets measure is up a more modest 3.7 per cent and remains well below its peak from the 2020 pandemic. While some of the world’s worst-performing currencies this year are from developing economies such as Sri Lanka, the outperformance of commodity-backed currencies such as Brazil’s real and Russia’s ruble have bolstered the EM grouping.

“Just by raising policy rates, other countries are unlikely to stop the depreciation of their currencies,” said Sayuri Shirai, a former Bank of Japan board member who’s now a Keio University professor.

That’s because “dollar strength not only reflects an expectation about the federal funds rate hikes this year – and thus higher demand for US fixed-income assets – but also reflects global recessionary risks arising from the greater-than-previously-expected policy rate hikes around the world,” she said.