• By The Financial District

As Bank Of Japan Diverges From Peers, Yen Weakness Tested

The yen's value may further slide and test the tolerance of price-sensitive consumers -- and Japanese policymakers, Kyodo News reported.

Photo Insert: The yen is currently facing a perfect storm.

The biggest driver would be the divergence between the US Federal Reserve, which has apparently entered a rate hike cycle, and a dovish Bank of Japan (BOJ) with repeated commitment to keeping powerful monetary easing for an extended period.

Surging crude oil and commodity prices in the aftermath of Russia's invasion of Ukraine have pointed to the worsening of the current account balance of the resource-poor Japan, supporting yen weakness. More broadly, the prospect of yen depreciation underlines the fragility of the world's third-largest economy with low growth potential, analysts say.

"The yen is currently facing a perfect storm," said Martin Schulz, chief policy economist at Fujitsu Ltd. The divergence of monetary policies among the BOJ, the Fed, and the European Central Bank has added to the momentum for yen weakness, with the US dollar in particular gaining from "its show of strength during global financial sanctions against Russia," Schulz said.

The dollar has hit a six-year high above 119 yen after the Fed's first rate hike decision since 2018. Market watchers say the psychologically important 120 yen line is in sight before what is perceived as BOJ Governor Haruhiko Kuroda's defense line of 125 yen.

All the news: Business man in suit and tie smiling and reading a newspaper near the financial district.

"The Finance Ministry and the BOJ cannot defend the yen against depreciation when demand is (also) driven by geopolitical trends," Schulz said, adding that a further slide in the yen is possible.

A weaker yen, however, would deal a blow to consumers who are sensitive to price hikes as a growing number of companies have already been passing on higher energy and raw material costs.

Banking & finance: Business man in suit and tie working on his laptop and holding his mobile phone in the office located in the financial district.

It would also become a sensitive issue for Prime Minister Fumio Kishida in the lead up to this summer's upper house election as ruling party lawmakers are ramping up their calls for additional stimulus to help households hit by higher energy, food, and other prices, amid uncertainty about the war in Ukraine.

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