Japan intervened to strengthen the yen for the first time in 24 years as a trio of European central banks raised interest rates, underlining the disruptive impact of inflation on currencies and monetary policy.
Inflation’s rise to multi-decade highs in much of the world has led to sharp increases in borrowing costs, with foreign exchange markets whipsawing. This in turn has set off what economists call a “reverse currency war” in which central banks seek to shore up their exchange rates against the dollar, through intervention or interest rate rises.
The latest moves, which included rate rises in the UK, Switzerland and Norway, came a day after the US Federal Reserve drove the dollar higher by announcing its third consecutive 0.75 percentage point rate rise on Wednesday.
However, Turkey’s central bank moved in the opposite direction, continuing its unorthodox policy by slashing its one-week repo rate from 13 per cent to 12 per cent despite inflation rising above 80 per cent last month. The lira fell to a record low against the dollar.
As investors bet the Fed and other leading central banks will raise rates higher than previously expected to bring inflation under control, US bond yields have risen, boosting the dollar and putting downward pressure on other major currencies including the yen, the pound and euro.
“The Fed is really setting the pace of interest rate rises and transmitting pressure to other central banks via the foreign exchange markets,” said Krishna Guha, head of policy and central bank strategy at US investment bank Evercore.
The yen has lost about a fifth of its value against the dollar this year, lifting the price of imports and contributing to an eight-year high in the growth of Japan’s core consumer prices, which exclude volatile food prices, to 2.8 per cent in the year to August.
Masato Kanda, Japan’s leading currency official, said on Thursday that Tokyo had “taken decisive action” to address what it warned was a “rapid and one-sided” move in the foreign exchange market. It was the first time Japan had sold dollars since 1998, according to official data.
The move caused the yen to surge to ¥142.39 to the dollar in the space of a few minutes. In the currency’s most volatile day since 2016, it had previously hit a low of ¥145.89 after the Bank of Japan signaled it would not change its forward guidance about interest rates and stuck to its ultra-accommodative policy.
Citigroup economist Kiichi Murashima said that, even if the BoJ were to fine-tune its policy, it would not fundamentally change the broader picture of a widening gap in financial conditions between Japan and the rest of the world. “It’s very questionable how far the government can actually avert the yen’s fall against the dollar,” he said.
There have been similar concerns in South Korea about this year’s 15 per cent fall in the value of the won against the dollar, prompting speculation about a potential currency swap arrangement with the Fed, which Seoul denied on Wednesday.
Japan is now the only country in the world to retain negative rates after the Swiss National Bank lifted its own policy rate by 0.75 percentage points on Thursday, taking it into positive territory and ending Europe’s decade-long experiment with sub-zero rates.
The Bank of England on Thursday resisted pressure to match the pace set by other major central banks, raising its benchmark rate by 0.5 percentage points to 2.25 per cent and pressing ahead with selling assets accumulated under earlier quantitative easing schemes.
But it also left the way open to take more aggressive action in November, when it will update its economic forecasts and assess the impact of tax cuts set to be unveiled on Friday by UK prime minister’s Liz Truss’ new administration.
Norway’s central bank also pushed up rates by 0.5 percentage points, indicating smaller increases would follow until early next year. Pictet Wealth Management estimated central banks around the world had this week raised policy rates by a cumulative 6 percentage points.
Emerging and developing economies are particularly vulnerable in what the World Bank’s chief economist has described as the most significant tightening of global monetary and fiscal policy for five decades.
In an interview with the Financial Times, Indermit Gill warned that many lower-income countries could go into debt distress.
“If you look at the situation of these countries before the global financial crisis and now, they are much weaker,” he said. “If you go in weak, you usually come out weaker.”
The interest rate rises set off heavy selling in government bond markets. US 10-year Treasury yields, a key benchmark for global borrowing costs, soared 0.18 percentage points to 3.69 per cent, the highest since 2011. Britain’s 10-year bond yield rose by a similar margin to 3.5 per cent.
The volatility in the bond market also rippled into equities, with the European Stoxx 600 falling 1.8 per cent. Wall Street’s S&P 500 fell 0.8 per cent by lunch time, leaving it on track for its third-straight fall as traders bet on further big rate increases from the Fed.