The currency slumped to its weakest since 2002 on Wednesday after Bank of Japan Governor Haruhiko Kuroda reiterated his determination for monetary easing in stark contrast with peers in the Federal Reserve.
Investors are betting a further divergence in U.S. and Japanese interest rates is inevitable and will outweigh efforts from government officials to pare back the currency’s slide.
The yen’s relentless drop continued on Friday, as it weakened for an 11th straight day against the dollar on bets further divergence between U.S. and Japanese interest rates are inevitable.
The Japanese currency fell as much as 0.5% to 126.56 per dollar to extend a 20-year low. Benchmark Treasury yields surged in the U.S. overnight, widening the gap with their peers in Japan.
Japan’s currency has been in freefall this year as the dovish Bank of Japan keeps local yields anchored to the floor while their Treasury equivalents surge on expectations for aggressive Fed rate hikes.
The yen has also suffered from Japan’s position as a commodity importer and is the worst-performing Group-of-10 currency against the dollar with a decline of about 9% this year.
When liquidity falls due the Easter holiday, accumulated dollar long and yen short positions would be unwound under normal circumstances, but this time, downside risks to dollar-yen appears to be close to zero. Dollar-yen enters a vacuum at the 127 level and there is a high probability markets will next aim for 128.
Daisaku Ueno at Mitsubishi UFJ Morgan Stanley Securities Co. said: “There is no reason to buy the yen with Japan suffering a trade deficit and being the furthest away among major countries to exit from monetary easing. The yen can reach 130 this year.”
Consensus is building among Tokyo market watchers that the yen can extend losses to the 130 per dollar level in coming months, before it steadies.