Yen's wild ride: Ups, downs, and Bank of Japan interventions
- The Japanese yen has been under pressure in the past few years as markets focused on the wide U.S.-Japan interest rate differentials.
The BOJ's hawkish move, along with investors' concerns about U.S. growth, jolted global stock and bond markets. It triggered an unwinding of the carry trade, whereby investors borrow cheaply in yen to invest in higher-yielding assets. The yen rebounded sharply against the dollar, but remains relatively weak by the standards of the past few decades.
The decision is highly political because Japan's reliance on exports makes the public more sensitive to yen moves than in other countries. With many manufacturers now shifting production overseas, the benefit of a weak yen has diminished. Instead, a weak yen has become a pain for households and retailers by inflating the cost of importing fuel and raw material.
Second, Japan is now importing more fuel and raw material than in the past, which means companies are converting yen into foreign currencies to make payments. Japanese policymakers are cautious about raising rates too aggressively for fear of hurting already-weak consumption and threatening a fragile economic recovery. They are also wary of the risk of triggering a sharp rise in long-term interest rates that would increase the cost of funding Japan's huge public debt.A weak yen pushes up the cost of importing fuel, food and raw material. That in turn hurts retailers and households through higher living costs.
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