Japan intervened to strengthen the yen for the first time in 24 years as a trio of European central banks hiked interest rates, underscoring inflation’s destructive impact on currencies and monetary policy.
Rising inflation to multi-decade highs in much of the world has caused the cost of borrowing to soar, with currency markets reeling. This, in turn, has triggered what economists are calling a “reverse currency war,” with central banks attempting to prop up their exchange rates against the dollar through intervention or rate hikes.
The latest moves, which included rate hikes in the UK, Switzerland and Norway, came a day after the US Federal Reserve boosted the dollar by announcing its third straight 0.75 percentage point rate hike on Wednesday.
Turkey’s central bank, however, moved in the opposite direction and continued its unorthodox policy, cutting its one-week repo rate from 13 percent to 12 percent, despite inflation rising to over 80 percent last month. The lira fell to a record low against the dollar.
As investors bet the Fed and other major central banks will hike rates more than previously expected to bring inflation under control, US bond yields have risen, boosting the dollar and other major currencies including the yen. the pound and the euro.
“The Fed is really setting the pace of rate hikes and putting pressure on other central banks through the FX 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, raising prices on imports and contributing to an eight-year high in growth in Japan’s key consumer prices, which excludes volatile food prices, to 2.8 percent year to August .
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Masato Kanda, Japan’s top currency official, said Thursday that Tokyo had taken “decisive action” to counter a “swift and unilateral” move in the foreign exchange market. According to official figures, it was the first time Japan had sold dollars since 1998.
This move took the yen higher to ¥142.39 against the dollar within minutes. It had previously hit a low of 145.89 yen on the currency’s most volatile day since 2016 after the Bank of Japan signaled it would not change its forward guidance on interest rates and maintained its highly accommodative policy.
Citigroup economist Kiichi Murashima said even if the BoJ refined 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 is very questionable how far the government can actually avert the yen’s fall against the dollar,” he said.
In South Korea, there were similar concerns over the won’s 15 percent fall against the dollar this year, sparking speculation about a possible currency swap deal with the Fed, which Seoul denied on Wednesday.
Japan is now the only country in the world to maintain negative interest rates after the Swiss National Bank lifted its own interest rate by 0.75 percentage point into positive territory on Thursday, ending Europe’s decades-long experiment with below-zero interest rates.
The Bank of England resisted pressure to match the pace set by other major central banks on Thursday, raising interest rates by 0.5 percentage points to 2.25 percent and ramping up the sale of assets accumulated under previous quantitative easing programs became.
But it also left the way open for more aggressive action in November, when it will update its economic forecasts and assess the impact of tax cuts to be announced by Britain’s Prime Minister Liz Truss’ new government on Friday.
Norway’s central bank also hiked rates by 0.5 percentage point, suggesting smaller hikes would follow until early next year. Pictet Wealth Management estimates that central banks around the world raised interest rates by a total of 6 percentage points this week.
Emerging and developing economies are particularly vulnerable to what the World Bank’s chief economist has called the most significant tightening of global monetary and fiscal policies in five decades.
In an interview with the Financial Times, Indermit Gill warned that many lower-income countries could face a debt crisis.
“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 rate hikes triggered heavy selling in government bond markets. US 10-year Treasury yields, a key measure of global borrowing costs, rose 0.18 percentage points to 3.69%, the highest since 2011. The UK 10-year bond yield rose by a similar range to 3, 5 percent.
Bond market volatility also impacted equities, with Europe’s Stoxx 600 falling 1.8 percent. Wall Street’s S&P 500 fell 0.8 percent through midday, on course for its third straight decline as traders bet on more big rate hikes from the Fed.