May 04, 2022 (The Economist) - The last time the Japanese yen dipped below 130 to the American dollar, in 2002, China’s economy was smaller than France’s, Vladimir Putin was meeting Western officials with a smile, and the rapper Eminem was atop the pop-music charts.
The yen’s slide to that abyss, first reached on April 28th and every day since, has been precipitous: it stood at just 115 to the dollar at the start of this year. Japanese policymakers have begun to fret, leading markets to speculate about whether they will intervene to halt the fall. That would probably prove futile: deep forces are driving the yen’s depreciation.
The most important one is the widening gap in interest rates between Japan and America (see chart). While prices have risen sharply in America, inflation in Japan has remained below the Bank of Japan’s (boj) 2% target. And though inflation may touch that mark later this year, the boj reckons it is being fuelled by one-off increases in costs; idiosyncrasies of Japan’s labour market have meant limited wage growth. As a result, even as the Federal Reserve has begun tightening rates, the boj has maintained its ultra-loose stance. At a monetary-policy meeting last week, the boj reaffirmed that direction, pledging to keep buying ten-year bonds. With more money to be made holding American bonds than Japanese ones, investors have snubbed the latter, dampening demand for the yen.
