The Japanese government is facing a dilemma, and it is a tough one. According to currency strategists at Saxo Markets, they have to make a crucial decision: should they throw a lifeline to the yen or the stock market?
Japanese policymakers are caught between a rock and a hard place. On the one hand, loose monetary policy is hammering the national currency. On the other hand, even a hint of tightening could send the stock market into a tailspin. Saxo Markets points out that this tightrope walk has put them in a difficult spot.
As a result, the yen, which traded as high as 161 to the US dollar at the end of June, has since slipped below 150 after the markets crashed. If fears of a recession in the US grow, the yen could take another dive. Experts note that this situation is also taking a toll on Japanese stocks.
Recently, the Japanese stock market plummeted by more than 13%. The current drop in the Nikkei index even surpassed the crash of Black Monday in 1987. Meanwhile, the Topix index, a key indicator for Japan’s stock market, tumbled by 9.2% in just two days.
Experts attribute the yen’s current volatility to the diverging monetary policies of Japan’s central bank and the US Federal Reserve. The Bank of Japan has long kept interest rates in negative territory, while the Fed has been hiking rates in recent years. The latest crash was fueled by the Bank of Japan’s decision to raise rates for the second time in six months, pushing the rate up to 0.25%.
