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In: Finance, Forex

The Bank of Japan stands out among major central banks with its commitment to maintain rock-bottom interest rates to boost a moribund economy, even as surging inflation worldwide spurs the U.S. Federal Reserve to roll back stimulus and raise rates. As a result, the yen has weakened dramatically against the dollar.

BOJ Governor Haruhiko Kuroda has said he’s not bothered by a weaker yen, Japan’s government bonds haven’t been immune from the global rout spurred by rising prices. That’s putting extraordinary strain on a BOJ policy known as yield curve control.

Finance Minister of Japan, Shunichi Suzuki ramped up government verbal warnings over the weakening of the yen with remarks that briefly supported a gain in the currency.

Suzuki told reporters Tuesday: “The government will closely monitor developments in the foreign exchange market, including the recent depreciation of the yen with a sense of vigilance, which includes the impact on the Japanese economy.

The yen briefly strengthened to 125.11 against the dollar from 125.48 before the remarks, though the gains were short-lived. The currency traded below levels seen before Suzuki’s comments within less than an hour.

The remarks are the latest attempt by Japanese policy makers to slow down moves in a currency that has sharply weakened in the last month as the Bank of Japan’s stimulus stance increasingly diverges from the Federal Reserve’s trajectory of interest rate hikes.

Investors and market watchers are keeping a close eye on whether the dollar will breach a 20-year high against the yen of 125.86, a development that could prompt another surge of yen weakening moves.

Traders tend to take profits or close positions when the dollar/yen approaches 125.86, which is a very key level, But given the dollar/yen’s trend is based on fundamentals and divergence in monetary policy, the market will again test the pair’s upside. Key near-term is whether Japan will change the tone in its verbal intervention. Once 125.86 is broken, the next target for the currency pair is 130.

The softer yen is amplifying the pain of soaring commodity prices on a fragile economy that is expected to have contracted slightly in the first three months of the year.

For now the BOJ is sticking to its stimulus stance arguing that underlying inflation is still too weak to warrant change, despite continued speculation it will have to tweak policy.

Prime Minister Fumio Kishida has ordered his government to come up with a series of measures to alleviate the pain of rising energy costs on consumers and businesses.

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