The yen continues to fall against the U.S. dollar on the background of the soft monetary policy of the Bank of Japan. For the first time since 1998, the exchange rate exceeded the mark of 139 yen per dollar. Over the last year, the yen has fallen in value by nearly 25

The dollar/yen exchange rate on the Forex market exceeded the mark of 139 yen for the first time since September 1998. The dollar rose 1.4% to 139.4 yen per dollar.

Japan’s currency has depreciated by about 20% since the beginning of this year, and the yen has depreciated against the dollar by a total of almost 25% over the past year. The main reason for this trend was the divergence between the super-soft monetary policy of the Bank of Japan and expectations of further tightening of the U.S. Federal Reserve policy in order to stop inflation growth.

Last month, the Fed raised its benchmark interest rate by 75 basis points, the sharpest increase since 1994. In all, the Fed has raised interest rates by 150 basis points since March. U.S. inflation accelerated to a new, 40-year high in June. For the year, prices rose 9.1% after an 8.6% gain in May and against a forecast of 8.8%. Rising inflation is provoking the U.S. Federal Reserve to further tighten monetary policy, leading to increased demand for the dollar.

Japan’s central bank cannot afford to raise rates as easily because of its high debt burden. High interest rates on government debt servicing are a critical component for Japan. Debt service costs account for a quarter of the country’s budget.

Japan’s interest rate has remained negative since 2016. The country’s regulator is pursuing an extremely soft policy, keeping the lending rate virtually at minus levels to stimulate the economy. At its June 17 meeting, the Bank of Japan left the main parameters of monetary policy unchanged. 

The short-term interest rate on commercial bank deposits at the Central Bank was left at minus 0.1% per annum; the target yield on Japan’s ten-year government bonds – about zero. The Bank of Japan also confirmed that it is ready for further policy easing, if necessary.

The exchange rate of the dollar may continue to grow up to 140 yen per dollar. This mark may trigger profit taking on long dollar positions, as it is considered a red line, the crossing of which increases the risk of a coordinated intervention to support the yen.