The dollar sank to a 15-year low against the yen on Wednesday, as the Federal Reserve’s pessimistic view of the American economy prompted investors to sell the American currency for safer assets.
The strengthening yen comes as a further blow to a Japanese economy that is suffering the effects of deflation.
The dollar, which has declined more than 10 percent against the yen in the last three months, dropped to 84.72 yen on the Electronic Brokering Services trading platform late Wednesday — the lowest level since April 1995, when the dollar hit a low of 79.75 yen in the aftermath of the 1985 Plaza Accords, the coordinated effort between major economies to depreciate the dollar.
In Japan, the dollar’s decline has ignited fears that too strong of a domestic currency could harm the country’s recovery, led by exporters like Toyota.
The yen tends to strengthen against other currencies despite a weak economy at home because Japan still runs a current-account surplus, making a run on the currency unlikely.
The yen’s strength has also fueled speculation that the Japanese government may intervene to weaken its currency. A strong yen hurts Japanese exporters by making their goods more expensive overseas and by eroding the value of their repatriated earnings. Japanese officials have held off suggesting that an currency intervention is in the works — a maneuver Tokyo has avoided since March 2004.
On Wednesday, the Japanese finance minister, Yoshihiko Noda, said he was “closely watching” currency markets.
Indeed, many analysts do not expect Japan to intervene. To be effective, such intervention requires international coordination; moreover, Tokyo has supported Washington’s efforts to pressure China to let its currency appreciate, as part of a commitment among the world’s largest economies to let market forces determine currency levels.
With intervention unlikely, the onus has fallen on the Bank of Japan to shore up the country’s faltering economy. The dollar-yen exchange rate is closely correlated with the spread, or difference, between interest rates in the United States and Japan, so by lowering interest rates in Japan, the central bank could help ease the upward pressure on the yen.
Pressure increased on the Bank of Japan to act after steps announced by Federal Reserve on Tuesday reinforced expectations that American interest rates would remain at record lows for some time. The Fed’s plan to buy government debt drove down yields in the Treasury markets, narrowing the spread with Japan, which was a factor in the yen’s spike on Wednesday.
But Japan’s interest rates are already near zero, limiting the central bank’s policy options. The bank also maintains that the economy is “gradually recovering,” making it difficult for policy makers to justify further monetary easing. At the end of a policy meeting on Tuesday, the bank announced it would leave monetary policy unchanged.
“The yen has appreciated to the level at which the B.O.J. has taken actions in the past,” Yunosuke Ikeda, a strategist for Nomura, wrote Wednesday in a research note. “However, we see no sign that the B.O.J. is very concerned about the economy’s downside risks.”
“We believe it is unlikely that the B.O.J. would take additional easing steps any time soon,” Ikeda said, but added that the central bank could get more serious about taking action if the Japanese currency were to hit levels closer to 82 yen to the dollar.