The yen is that the near-10% slide against the dollar this year.

The first thing to note about the yen is that the near-10% slide against the dollar this year is a reflection of yen weakness, not dollar strength. The yen has fallen against all G10 currencies this year, with the fall against the Aussie the most (close to 12%) and the Swedish krona the least (close to 4%).

In contrast, the dollar has only risen against non-commodity currencies this year, falling or remaining broadly stable against the Australian dollar, New Zealand dollar, Norwegian krone, and Canadian dollar.With this in mind, Japanese policymakers can’t justifiably argue that yen weakness is just a reflection of broad dollar strength. But if dollar strength is not to blame, what is it, and how do policymakers go about correcting it?

There’s been a perfect storm working against the yen this year. The first component is the sharp deterioration in Japan’s terms of trade due to its dependency on commodity imports, particularly energy. Mr. Steve Barrow, Head of Standard Bank G10 Strategy, noted above that commodity-based currencies have held their own against the dollar this year (and rallied sharply against the yen), and this reflects the fact that their terms of trade have improved sharply. Very often, big movements in the terms of trade are associated with big currency movements. Japan’s terms of trade have deteriorated by almost a quarter since the height of the COVID outbreak in 2020 and, over the same period, the yen’s effective exchange rate has toppled by 12%.

A second factor is that the yen has not encountered significant safe-haven demand despite high-stress events such as COVID and the Russia-Ukraine conflict. Very often, such events cause heightened risk aversion in asset prices, and those investors using the yen as a low-rate funding currency for carry trades will exit these risky positions and revert back to the yen, lifting its value. But the striking thing about the Russia-Ukraine conflict is that there’s been scant sign of any surge in demand for safe assets.

In essence, what has happened is that the terms of trade effect from the Russian conflict has dominated any safe-haven demand and that’s left the yen reeling. Of course, we can’t talk about a perfect storm of pressure against the yen without mentioning interest rates. Yield spreads have clearly moved significantly against the yen, not just with respect to the dollar but other G10 currencies as well, as only Switzerland (another safe-asset country) seems as deeply embedded in its low policy rate mantra as the Bank of Japan. So, not only have yields moved against the yen, but the BoJ has given no sign that it might try to narrow the rate gap with policy rate increases of its own.

Quite the reverse, the BoJ has been keen to stress that a likely rise to 2% inflation levels soon will be temporary and not a sign of the sustained 2%-plus inflation that the bank wants to see in order to tighten monetary policy. When we frame the yen’s position in this way, it seems pretty hard to fathom how Japanese policymakers can turn it around if, indeed, they even try.

For now, Mr. Steve Barrow suspects that they won’t try, and besides, policymakers are not going to be able to address some of the factors pulling the yen down, such as trade weakness and investors’ weak safe-haven demands. Monetary policy and FX intervention seem to be the only alternatives, and he doesn’t think that the bank is about to use either.

In fact, in the end, we are likely to find that, like many times in the past, policymakers’ complaints about yen volatility turned out to be empty threats. And, if that’s the case, the yen seems likely to lose more ground until, eventually, terms of trade effects and monetary policy differences smooth themselves out, but that could still be a few years away.