What does the chart show?

 This week’s chart shows the exchange rate of the Japanese yen against the US dollar (showing JPY per 1 USD). The yen’s recent depreciation (illustrated by an upward sloping line) started in early 2021 though it has recently depreciated against the dollar every day for 13 days up to 19 April – its longest losing streak since 1971* – and now sits at its weakest level since May 2002, as divergence between monetary policy paths weighs on the Japanese currency. Yen weakness has traditionally been beneficial for Japan’s export-driven economy (as their translated earnings are worth more in yen terms), but at these levels companies are more concerned about how it will further inflate fuel and raw material imports which are already surging due to the war in Ukraine. Japan is a large importer of oil and gas, and the big price rises in those markets pushed the country’s trade deficit to its widest point in eight years in January. 

Why is this important? 

Many investors have often owned the Japanese yen as a safe haven asset during periods of financial and geopolitical stress. Yet so far this year the currency has weakened over 10% against the dollar, leading some to question its traditional diversification role. On many metrics the yen looks cheap now. However, further hawkish comments from Fed officials have continued to widen the policy divergence between the Bank of Japan (BoJ) and the Fed. The BoJ’s pledge to continue stimulus measures in order to boost Japan’s economy and maintain interest rates of -0.1% massively differs from other key central banks, particularly the Fed, where policymakers have already started raising interest rates this year to combat surging inflation. Whilst US consumer inflation sits at 8.5% today, in Japan it is just 0.9%. The BoJ has also reaffirmed its commitment to yield curve control by purchasing Japanese Government Bonds (JGBs) without limit to keep 10-year yields near 0% which has widened the gap between yields on JBGs and US Treasuries. The surge in inflation across western countries has made central banks like the Fed increasingly hawkish and determined to push ahead with their rate rises despite uncertainties of the financial ramifications from the war in Ukraine whereas Japan’s central bank remains unwaveringly dovish.

*Bloomberg data only dates back to 1971