(Bloomberg) — While the yen’s plunge to a four-decade low against the dollar has dominated headlines, a broader gauge of the Japanese currency’s health is also flashing a warning.
The Bank of Japan’s nominal effective exchange rate index — which measures the yen against a trade-weighted basket of currencies — has extended its slide to fresh record lows this year, reflecting the currency’s broad-based weakness against the euro, sterling and several Asian peers.
The decline underscores how the yen’s weakness extends well beyond the dollar, intensifying concerns about inflation and Japan’s eroding purchasing power. A weaker trade-weighted yen pushes up the cost of imports from a broader range of trading partners, complicating the Bank of Japan’s efforts to normalize monetary policy without undermining economic recovery.
“The yen’s real value, not only against the dollar but broadly against a basket of currencies, has continued to decline, which could be a source of concern for the authorities,” said Ugo Lancioni, senior portfolio manager at Neuberger. “A more forceful intervention, possibly combined with other measures, may be needed to be fully successful going forward.”
Authorities spent ¥11.73 trillion ($71.9 billion) intervening in foreign-exchange markets between April 28 and May 27, but failed to prevent the yen from sliding to fresh 40-year lows.
The yen on Thursday slid to its lowest level since 1986 against the dollar, pressured by wide interest-rate differentials, elevated oil prices and mounting concerns over Japan’s fiscal outlook. The currency fell 0.4% versus the dollar to trade around 163.78 as of 2:30 p.m. in New York, and is down this month against all but three of the 16 major currencies tracked by Bloomberg.
What Bloomberg Strategists Say…
“Japanese officials will need to keep reinforcing the message that tighter monetary policy is a serious possibility. Traders remain unconvinced with a rate increase at the BOJ’s October meeting still not fully priced. For yen bulls to take control, they may need to see the September meeting become live for a hike.”
-Mark Cranfield, Markets Live Strategist, Singapore. For the full analysis, click here.
Japan’s central bank officials are open to raising interest rates at a faster pace than the consensus among economists, as the yen’s continued weakness adds to upside inflation risks, Bloomberg News reported.
Policymakers last month raised the benchmark rate to 1%, the highest in 31 years, but the BOJ is widely expected to stand pat at its July 31 meeting. Traders expect another rate hike in December.
–With assistance from Carter Johnson.
(Updates with latest prices in fifth paragraph, adds Markets Live comment.)
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