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The fundamental reason the yen has dropped below 140 per dollar for the first time in nearly 25 years is that Japan's central bank is maintaining ultra-low interest rates while the Federal Reserve and other central banks are carrying out disproportionate rate hikes. The Bank of Japan believes more has to be done to reinforce inflation in the thoughts of both consumers and companies after years of stagnation because price increase in Japan is significantly slower compared to the United States. The unprecedented decline of the yen has benefitted and hurt the economy, industries, and households in equal measure. The severity of its collapse prompts officials to consider whether they should intervene in the currency market or alter BOJ policy to stop it.
As US rate rises and Japanese rates remain low, investors are drawn to dollar-denominated investments, which is why the yen is dropping. While the Bank of Japan maintains a 0.25% restriction on the yield on Japan's 10-year government bonds, yields on Treasuries have increased as speculators bet that the Fed will keep raising rates aggressively. Japan's persistent trade gap and the country's still-modest economic recovery are both exerting deflationary pressure on the yen. The Bank of Japan's governor has argued repeatedly that it is too early to stop monetary easing since the protracted battle against inflation has not yet been won. Beyond the BOJ's 2% target, inflation has risen, but the bank claims the trend is not permanent and anticipates a decline in inflation.
Major Japanese corporations with overseas market typically benefit from a cheaper yen because it increases the value of their profits that are brought from outside. Japan's earnings have reached their best levels since 1950s, partially because of the yen's decline. Low borrowing costs also aid in Japan's economy's recovery from Covid-19. On the other hand, a weak yen raises the prices of food and energy imports, which increases living expenses. The Finance Minister of Japan made a hint that a state intervention in the financial market was very likely to happen soon. It would be the first time since 1990s if the government intervened in the markets to support the yen. Much will depend on how much the Fed raises interest rates. Once investors have fully priced in the Fed's rate increases or the US enters a recession, weakening the dollar, the yen's decline may come to an end.
