Comprehensive Breakdown! Yen's Real Effective Exchange Rate Hits Another Historical Low, Depreciation Wave Spreads from US Dollar to Global Currency Basket

Odaily Finance App has noted that although the yen's exchange rate against the US dollar has fallen to a 40-year low and dominated the headlines, a broader measure of yen strength is sending Japan an equally alarming signal.

The Bank of Japan's nominal effective exchange rate index—designed to measure the yen's performance against a trade-weighted basket of currencies—has continued its downward trend this year, hitting a new historical low. This reflects a broad-based weakness of the yen not only against the euro and the pound but also several Asian peer currencies.

On Wednesday, the yen-dollar exchange rate strengthened slightly from 1 dollar to 163.13 yen to 1 dollar to 162.69 yen. Meanwhile, Japan’s 2-year government bond yield rose to its highest level since 1995, with the 5-year government bond yield reaching 1.995%.

This decline highlights that the yen’s weakness has gone far beyond its exchange rate against the US dollar, intensifying concerns about imported inflation and erosion of Japan’s purchasing power. The weakening of the trade-weighted yen has driven up import costs from a broader range of trading partners, making the Bank of Japan’s efforts to normalize monetary policy without harming the economic recovery more complex.

Neuberger Senior Portfolio Manager Ugo Lancellotti said: "The real value of the yen is falling not only against the US dollar but also across a basket of currencies, which could become a source of official concern. In the future, stronger intervention measures may be required, combined with other means, to achieve meaningful results."

As the yen’s continued weakness fuels upside risks to inflation, central bank officials are open to raising rates at a faster pace than economists expect. The market generally expects the Bank of Japan to stand pat at its upcoming July 31 meeting, with the next rate hike projected in December. Last month, policymakers raised the benchmark interest rate to 1%, the highest in 31 years.

Weighed down by a huge interest rate differential, high oil prices, and concerns over Japan’s fiscal outlook, the yen has fallen below 163 per dollar, hitting its lowest level since 1986. Officials spent 11.73 trillion yen ($71.9 billion) intervening in the foreign exchange market from April 28 to May 27, but failed to stop the yen from sliding to its lowest level in 40 years.