The Yen steadily depreciated against the ever-rising dollar following the G7 meeting last week. The G7 discussed the spillover effects of the dollar at the meeting; nevertheless, there was no conclusive coordinated intervention at the end of the meeting. Hence, the lack of coordinated intervention leaves Japan with solo intervention and continued ‘jawboning’ as its most likely response.
The Yen’s depreciation results from a typical ‘carry trade’, where benefits are accrued from borrowing lower-yielding currencies such as the Yen to invest in higher-yielding currencies like the dollar. The imbalance between both currencies will persist, provided the Fed keeps hiking its interest rates aggressively. The Bank of Japan (BoJ) continues to cap its interest rates to stimulate a historically deflationary economy. The BoJ’s Wakatabe mentioned last week that the Bank is anticipating stabilising inflation at 2% in the longer term before considering a change in the ultra-dovish monetary policy stance. The Japanese inflation data on Friday will clarify whether the 2% goal is heading in the right direction.