What’s going on here?
The Japanese yen fell to its weakest level against the US dollar since 1990.
What does this mean?
Japan’s currency has had a rough start to the year, with the yen weakening against every developed country’s currency. See, despite Japan bringing interest rates up from their sub-zero spot, those rates still look squat – and lower interest rates make a country’s currency less attractive to investors. Meanwhile, the US dollar – the strongest currency this year – has picked up by 7% against the yen. So after the yen reached its lowest level against the dollar in over three decades on Wednesday, whispers spread that Japanese government officials were planning on meeting with the Bank of Japan (BoJ). Investors then started speculating that the central bank might intervene in the currency market, selling its own stacks of US dollars and buying the yen to give it a leg up.
Source: Google Finance
Why should I care?
Zooming in: Investors are seizing the opportunity.
The US’s 5.25% interest rate is widely expected to hit 4.5% by the end of the year. But in Japan, investors expect the barely-above-zero rate to land at just 0.3% by then. Traders had expected rates to end up higher, bringing the yen up with them, but those hopes have been dashed by the BoJ. That has investors sticking with their “carry trades”: borrowing money in yen to buy a currency that earns a higher interest rate, and pocketing the difference between the two.
For markets: Businesses love a bargain.
Mind you, the weaker yen does have one benefit. The cheaper currency makes Japanese companies’ products and services more affordable for international customers, while the stronger US dollar means they make more yen per buck when converting their takings back into their home currency. That’s plumped up the earnings of Japanese firms which, in turn, has attracted investors to their stocks – especially as their valuations look cheap and business-boosting government reforms are underway.
