Japan’s Yen Takes a Beating in a Global Market Rout, Breaking With Habit

As the dollar has made broad gains, the yen has taken a beating in part because the

Bank of Japan

has pledged to continue its low-interest-rate policy despite Japan seeing slight inflation. It has rejected calls to tighten borrowing conditions.

The Federal Reserve sits at the other end of the spectrum: It has lifted rates in half-percentage-point increments to curb what has become the highest U.S. inflation in more than four decades. The Fed meets this week to consider additional increases, and any moves it makes will cascade further into the economy.

As the world’s third-most-traded currency and the spending mechanism of a key economy, the yen is an important piece of financial markets. Some have even voiced concern that the yen’s weakness might inflict pain on the sprawling U.S. Treasury market.

A cheap yen is typically a boon for the Japanese economy, which is driven by exports such as automobiles. Japan’s exporters, however, are starting to show concern over the yen’s latest slide because it is happening at the same time as rises in commodity prices and supply shortages.

“In normal times, a weak yen brings benefits through exports of cars and increases profits on the whole,” said Seiichi Nagatsuka, vice chairman of the Japan Automobile Manufacturers Association, at a news conference. “The downside of a weak yen is getting bigger, given surging prices of resources and parts.”

Tadashi Yanai,

chief executive of Uniqlo operator

Fast Retailing Co.

, said a weak yen isn’t good for the country’s economy.

“There is no merit of a weak yen at all” for the Japanese economy, he said in April. “Because Japanese companies make products using raw materials from all over the world, add value and sell them; it can’t be a plus that our currency is undervalued.”

Typically when markets are falling, the yen is a haven asset that investors run to, similar to the dollar. But investors didn’t seek shelter in the yen during the market’s latest rout, analysts say, in part because of the monetary-policy divergence between the U.S. and Japan, and because of Japan’s trade deficit in recent months, which some say could persist. Analysts also said the energy shock created by the war in Ukraine means Japanese importers need more dollars to buy oil and gas.

Meanwhile, hedge funds and investors that have sold the yen are becoming wary that the dollar’s rally might be nearing an end, particularly if the U.S. economy slows as borrowing costs increase and consumers feel the effects of inflation.

Some hedge funds betting on an economic slowdown in the U.S., or an eventual recession, are buying options that pay out if the yen appreciates.

Goldman Sachs

analysts estimate the dollar is overvalued by 30% against the Japanese yen. The Wall Street bank in a note is advising clients to buy an option that pays out if the dollar depreciates below 115 against the Japanese yen in six months. One dollar currently costs around 134 yen.

“The trade-weighted yen is at its weakest since the Reagan administration,” said

Zach Pandl,

Goldman Sachs co-head of global foreign exchange, interest rates and emerging markets strategy. “The dollar’s level against the Japanese yen is not sustainable.”

Inflation is the biggest reason for the diverging positions of the two countries’ central banks. In April, overall consumer prices in Japan rose 2.5% from a year earlier. The index excluding volatile fresh-food and energy prices rose just 0.8%. In the U.S., meanwhile, consumer inflation reached an 8.6% annual rate in May as energy and food prices surged.

Japan’s Ministry of Finance, the Bank of Japan and the Financial Services Agency on Friday expressed concern over the yen’s rapid weakening.

“The government and the Bank of Japan will closely coordinate and monitor the developments in the foreign-exchange market and their effects on the economy and prices with a stronger sense of urgency,” the agencies said, noting they would take action if necessary.

But investors don’t expect the Bank of Japan—which has a history of intervening in foreign-exchange markets at the behest of the finance ministry—to step in. If it did, it would be through currency purchases rather than tightening policy—a move unlikely to make much of an impact unless the U.S. joined in, which is doubtful given its inflation situation.

“The official pain threshold to provoke direct currency intervention is still a long way off,” said

Alan Ruskin,

a strategist at Deutsche Bank. “Japan has become progressively less interventionist over the last decade.”

The Bank of Japan last intervened in currency markets in October 2011. The last time it sold dollars and bought yen was in June 1998.

Steve Englander,

head of global FX research and North America macro strategy at Standard Chartered, said the yen’s recent bout of weakness is different from previous episodes because it stems from a broader move in the dollar, and he expects the currency to strengthen.

“Most such moves have happened from a point of severe yen overvaluation, which is not the case here,” said Mr. Englander. “The sort of spike that we are seeing does not last long.”

Write to Julia-Ambra Verlaine at [email protected] and Megumi Fujikawa at [email protected]