On Tuesday afternoon, the yen dropped to its lowest level in a year at 150.165 against the dollar, before bouncing back to around 147. By Thursday morning, it was at 148.4.

The yen’s sharp fluctuations against the dollar on Tuesday led to trader conjecture about potential official measures to halt the currency’s losses. However, this discussion misses the larger point: the combination of escalating US bond yields and Japan’s extremely low interest rates will continue to put pressure on the yen. Until there is a tightening of monetary policy, Japan will have to accept an exchange rate influenced by Washington.

On Tuesday afternoon, the yen dropped to its lowest level in a year at 150.165 against the dollar, before bouncing back to around 147. By Thursday morning, it was at 148.4.

The yen has depreciated more than 13% against the dollar this year due to increasing US bond yields, surged by expectations that the Federal Reserve will need to maintain high interest rates or even increase them further to control persistent inflation.

Meanwhile, the Bank of Japan has been sending mixed signals about ending its ultra-loose monetary policy but has yet to take decisive action, partly due to concerns about stifling fragile economic growth. 

In their last meeting, Bank of Japan Governor Kazu Ueda and his team decided to keep short-term interest rates at minus 0.1% and continued targeting a yield of around 0% for 10-year government bonds. Consequently, the gap between US and Japanese ten-year sovereign bonds reached its highest point in over two decades, making the dollar more attractive than the yen. Given Japan’s heavy reliance on imported goods, including energy and raw materials, a weak currency increases local companies’ costs and results in higher fuel prices.

Despite core inflation rates exceeding the Bank of Japan’s central target of 2% for 17 consecutive months, and Ueda may be convinced to increase interest rates soon. However, without domestic interventions, Japanese producers and speculators betting on a yen increase can only hope for an unexpected slowdown in the US economy that would force the Federal Reserve to reduce interest rates early next year.