Will Japanese Yen Fall Further?

The main reason is that interest rates in the United States are rising, while Japanese rates remain low, making dollar-denominated assets more appealing to investors. Treasury yields have risen as traders bet the Fed will keep raising rates aggressively, while the BOJ maintains a 0.25% cap on Japan's 10-year government bond yield. Japan's economic recovery remains modest, and the country's ongoing trade deficit is also putting downward pressure on the yen.

Haruhiko Kuroda, governor of the Bank of Japan, has argued repeatedly that it is premature to end monetary stimulus since the protracted battle against deflation has not yet been won. The BOJ's 2% objective for inflation has been exceeded, but the bank maintains the trajectory is no sustainable and anticipates a drop in inflation in the year beginning April 2023. Stronger wage growth, according to Kuroda, is required to ensure stable inflation.

Although Kuroda expressed alarm over the yen's sudden depreciation, he was clear that the BOJ would not alter its course of action as a result. These action was taken from Shinzo Abe era who recently died in a terror attack.

Much will depend on how much the Fed raises interest rates. As long as the BOJ keeps a lid on domestic bond yields, the rate differential between Japan and the US will widen as Treasury yields increase in steepness. Investors banked on Japan following the Fed by raising interest rates earlier this year. Although there are still some rumors of potential change, they have generally subsided as a result of the BOJ continually demonstrating its commitment to upholding the yield cap. When investors have fully priced in the Fed's rate increases or the US enters a recession, weakening the currency, the yen's decline may come to an end.