To Halt Yen’s Plunge, Japan Gets Ready to Sell Foreign Exchange Reserves Instead of Hiking Interest Rates. Won’t Work for Long. Markets Can Win this Battle | Wolf Street

The yen started plunging against the dollar in January 2021. At the time it took about ¥104 to buy $1. The plunge took on momentum in March 2022, when the Fed started hiking its policy rates. Yesterday evening it took ¥144.8 to buy $1, a level the yen hasn’t seen in decades. On the news of the rate check, the exchange rate briefly rose by ¥2 to ¥142.7, but has now already given up some of the gains and is trading at ¥143.2 to the USD, as markets harbor their doubts,

The plunge of the yen against the dollar is a big problem for Japan that authorities have been lamenting for months: Raw materials, fuels (nearly all of which Japan is importing), agricultural products, industrial materials and components, consumer goods, etc., are getting much more expensive to buy with the much weaker yen, which has been cutting into profit margins, has been ballooning the trade deficit, and has been fueling the wrong kind of inflation which is cutting into consumption by consumers.

The BoJ could solve the currency problem by abandoning its rate peg on the 10-year yield and letting it go, and by hiking its short-term policy rates in big catch-up rate hikes to get somewhere near the Fed’s rates, and by ramping up quantitative tightening.

To Halt Yen’s Plunge, Japan Gets Ready to Sell Foreign Exchange Reserves Instead of Hiking Interest Rates. Won’t Work for Long. Markets Can Win this Battle | Wolf Street