(Bloomberg) — While the yen’s plunge to a four-decade low against the dollar has dominated headlines, a broader gauge of the currency’s strength is sending an equally worrying signal for Japan.
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 over imported 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 the 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.”
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. The BOJ is widely expected to stand pat at its upcoming July 31 meeting, with another rate hike expected in December. Policymakers last month raised the benchmark rate to 1%, the highest in 31 years.
The yen has weakened beyond 163 per dollar, its lowest level since 1986, weighed by wide interest rate differentials, elevated oil prices and concerns over Japan’s fiscal outlook. 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.
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