The Japanese currency, the yen, fell Wednesday, April 13 to a 20-year low against the dollar, weighed down by the widening gap between Japan’s ultra-accommodative monetary policy and the Fed’s tightening of its monetary policy in response to U.S. inflation.

The U.S. currency, the dollar, was trading for 126.15 yen at around 06:30 GMT, having broken through 125.86 yen a few minutes earlier for the first time since 2002. The yen has been on a downward slope against the dollar since early 2021 when yields on U.S. Treasuries rose sharply amid a sharp rebound in U.S. growth and the start of accelerating inflation in the country.

The yen had already lost 10% of its value against the greenback last year and has lost more than 8% since the beginning of this year. The weakness of the Japanese currency was further exacerbated when the U.S. Federal Reserve (Fed) began tightening monetary policy to counter rising inflation in the United States.

The Central Bank of Japan (BoJ) is maintaining its ultra-accommodative monetary policy, believing that the macroeconomic conditions in Japan are still not right for tightening. The surge in energy and other commodity prices, which has intensified since the crisis in Ukraine in late February, has further accelerated the fall of the yen since last month.

For decades, the yen has traditionally been a “safe haven” in times of severe market turbulence. However, this status has not worked since the beginning of the Russian-Ukrainian conflict, because the surge in energy prices is widening the trade deficit of Japan, a major importer of hydrocarbons.

The BoJ continues to believe for the moment that the weakness of the yen is globally positive for the Japanese economy, by improving the price competitiveness of the country’s exports and by boosting the profits of its companies when they convert their foreign earnings into yen.

The Japanese government is on the same line as the Central Bank of Japan, but this is beginning to be debated in Japan. The sharp fall in the yen and soaring energy prices are undermining small and medium-sized companies focused on the domestic market, as well as the purchasing power of Japanese households, whose consumption is already at half mast.

Japanese politicians have recently made numerous statements expressing alarm at the plunge in the national currency. On Tuesday, April 12, Japanese Finance Minister Shunichi Suzuki assured that the government would “closely monitor developments in the foreign exchange market”. Prime Minister Fumio Kishida told parliament that rapid fluctuations in the yen were “undesirable” and that stability in the exchange rate was “important”.