The yen continues to weaken against the dollar, hitting its lowest level in three-and-a-half months.Investors are skeptical that the current diplomatic climate will allow the Japanese government to intervene to support its currency.
The USDJPY pair surged above ¥156.00 early Friday, with the yen reaching a fresh 3.5-month low against the greenback. Many investors believe further currency intervention by Japanese authorities is unlikely in the near future, despite repeated verbal warnings from the Japanese government about the yen’s sudden decline.
The primary driver behind the yen’s sell-off is the widening yield gap between Japan and the United States. Investors are concerned about the impact of policies outlined by U.S. President-elect Donald Trump. One major worry is that his promise to extend and increase tax cuts could worsen budget deficits and elevate government debt.
The dollar has gained strength on market expectations that the Trump administration’s policies, including tariffs and tax cuts, could drive inflation higher, thereby limiting the Federal Reserve’s ability to cut interest rates.
On Thursday, Fed Chairman Jerome Powell indicated that the U.S. central bank is in no rush to lower interest rates, leading traders to scale back their more aggressive bets on a rate cut next month and beyond.
The greenback was set to notch a weekly gain against the yen. The latest blow to the yen’s value came this morning when the Japanese government released new economic data. Japan's gross domestic product (GDP) grew by 0.3% year-on-year in the third quarter, marking a significant turnaround from a revised 1.1% contraction in the second quarter. This ends two consecutive quarters of shrinking growth. The July-to-September period also coincided with the Bank of Japan raising interest rates and ending its negative-rate policy.
This unexpected economic growth surprised markets and contributed to the yen’s depreciation. Typically, higher interest rates dampen economic activity by making borrowing more expensive. However, the Bank of Japan has stated that it will raise rates again “if economic activity and prices develop as expected.” More recently, though, Prime Minister Shigeru Ishiba has opposed further rate hikes, arguing that monetary policy should remain supportive of growth.
