The Japanese yen has continued to depreciate against the US dollar, reaching a 38-year low. The biggest driver of the yen's depreciation in 2024 is the significant gap in interest rates between Japan and the United States. Bets on American rates have been the dominant force in the currency market, with the yen down more than 12% against the greenback this year. This depreciation has made Japan a cheap destination for tourists, benefiting from affordable travel. However, importers are facing challenges due to the rising cost of raw materials and goods. International investors are also experiencing currency losses as the value of their yen-denominated assets erodes. The yen's weakness could potentially destabilize other Asian currencies. The Bank of Japan (BOJ) is facing the dilemma of balancing economic stimulus with the risks of a falling currency. The BOJ can potentially raise its main rate from zero, and many economists expect a hike soon. Atsushi Mimura is set to become the top foreign exchange official in July. The BOJ has been cautious in intervening in the markets, in line with Group of Seven agreements that discourage such a hands-on approach. Traders are closely watching for any signs of lower US rates, as this will have a significant impact on the yen's trajectory. The policies of the Bank of Japan and the Federal Reserve will continue to play a crucial role in determining the USDJPY narrative. The yen carry trade, where investors borrow cheaply in yen to invest in higher yielding assets, has also contributed to the yen's depreciation. The yen's slump could have far-reaching implications across global currency markets.
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