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The Tell: Here’s why the yen is at a 36-year low versus the U.S. dollar, by one measure

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The Japanese yen is cheapening against the dollar amid Treasury yields’ recent rise, a weakening Chinese economy, and higher oil and import prices.

Historically, the yen has been regarded as a haven, or one of the safest places for investors park funds during troubled times. Yet the Japanese currency has been left behind as another traditional safe haven —the dollar — -keeps rising. That dynamic has sent the USDJPY
USDJPY,
+0.27%

pair to a level not seen in years, with one dollar changing hands at 113.58 yen as of Tuesday.

Global growth is losing momentum — with the International Monetary Fund reducing its forecasts for the U.S., Japan and a number of countries on Tuesday — just as rising inflation is pressuring central banks to tighten policies that were made more accommodative as the COVID-19 pandemic gripped the world and hobbled economic expansion.

Historically investors have turned to the yen, one of the world’s most heavily trade currencies, because it is liquid and had been underpinned by Japan’s strong trade surplus.

Expectations for eventual tightening from the Federal Reserve, however, has been one factor behind higher Treasury yields over the past month, which in turn are giving the dollar a boost.

The U.S. Dollar Index
DXY,
+0.10%

has climbed roughly 2% in the past month and 5% since June, while the yen is struggling in part because of an increased economic reliance on China, where tighter government regulations and the pandemic are making the country’s recovery bleaker.

On an inflation-adjusted basis, things get even worse for the yen. After adjusting for the consumer-price index, the USD/JPY is hovering around 250—a level not seen since before the Plaza Accord was signed in 1985, according to Société Générale strategist Kit Juckes. The Plaza Accord is the historic agreement that marked a successful effort by G-5 nations, including Japan, to reverse what had been an overvalued dollar.

“As long as we worry about China, watch US yields rise and watch oil (and natural gas) prices spike, there’s no encouragement for the yen,” Juckes wrote in a note Tuesday. “I still don’t think its status as a haven currency is dead, but there simply hasn’t been a big enough pull-back in risk sentiment to test that one way or the other.”

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