Yen Tumbles to Lowest Since 1998 as Policy Driven Fall Continues

• Yen weakens as BOJ lags Federal Reserve’s policy tightening
• BOJ steps up defense of easy policy as bond yields push limit

The yen fell to a 24-year low and Japanese bonds tumbled Monday as the country’s easy monetary policy increasingly stood at odds with rising interest rates globally.

The currency fell more than 0.5% to 135.19 per dollar, the lowest since Oct. 1998, as Treasury yields extended Friday’s inflation-shock driven gains and the Bank of Japan offered to buy more bonds to cap local equivalents.

The yen has tumbled almost 15% this year -- the worst-performing major currency -- as the BOJ keeps rates anchored to boost a sluggish economy while US yields surge on bets for continued Federal Reserve hikes.

Friday’s shock higher-than-expected US inflation print has heaped pressure on the Fed to intensify monetary tightening, boosting the dollar. In sharp contrast, the BOJ looks set to maintain its super-loose stance at its meeting later in the week.

Senior Japanese officials haddelivereda ramped-up warning on the yen’s decline Friday, putting their concern in a written statement for the first time as they seek to keep a floor under the currency.

Treasuries Dare Fed to Step Up Hikes or Risk Inflation Defeat

The weakening yen is expected to have a mixed impact on the domestic economy, hurting household budgets but providing a boost to exports. A further slide would increase pressure on neighboring Asian economies, which are losing out in export competitiveness.

“While Japanese authorities have stepped up warnings, there are few tools available to stop this momentum,” said Akira Moroga, manager of currency products at Aozora Bank in Tokyo. “The environment remains ripe for speculators to drive dollar-yen higher.”

Bond Buying

With Japan’s government bond yields under severe upward pressure, the BOJ on Monday ramped up the defense of its policy targets, saying it would buy an additional 500 billion yen ($3.7 billion) worth of 5-year and 10-year bonds on Tuesday.

The move came after the 10-year yield rose above 0.25% for first time since January 2016, the highest since before the central bank introduced a negative rate policy and set a ceiling for the maturity.

“The BOJ will now need to explain clearly what is the logic behind the 0.25% cap and whether that level is appropriate under the current environment,” said Mari Iwashita, chief market economist at Daiwa Securities Co.

The BOJ is unlikely to adjust policy until the yen breaches the 140 level against the dollar, a recent survey of economists by Bloombergshowed.

The US Treasury’s semiannualreporton foreign exchange released Friday may have added to the yen selling pressure, said Yuji Saito, executive director at Credit Agricole CIB’s foreign-exchange department in Tokyo. It suggested currency intervention should only be reserved for exceptional circumstances with prior consultation.

“It essentially rejected Japan intervening for yen weakness that came as a result of widening interest rate differentials because Japan is pursuing an easy monetary policy on its own decision,” Saito said. “Dollar-yen’s uptrend is unlikely to stop until US economy slows down or inflation peaks.”