The yen fought for a footing on Tuesday, following its worst session in 16 months, as the Bank of Japan pins down bond yields at a time when they are rising sharply in the rest of the world.
The Japanese currency fell as much as 2.4% to 125.10 to the dollar overnight, its lowest since August 2015, before recovering to 124.24 in volatile morning trade in Tokyo.
The U.S. dollar was broadly steady elsewhere, keeping the euro at $1.0988 and capping a recent rally in the Australian dollar to hold it at $0.7483.
Japan's central bank bought a little more than $500 million in bonds on Monday and has vowed three more days of unlimited purchases to defend its 10-year yield target of 0.25%.
The move, a demonstration of resolve to keep Japan's monetary policy ultra easy, underscores the stark contrast with an ever-more-hawkish sounding U.S. Federal Reserve and has tipped the already-sliding yen off a cliff.
It is down nearly 7% this month and almost 10% on a resurgent Aussie. But with Japanese government bond yields (JGBs) barely retreating it is clear that some investors doubt the longevity of Japan's policy.
"Anyone who watched the RBA 'cap' blow is probably excitedly (and logically) short JGBs right now hoping for a similar move in Japan rates," said Brent Donnelly, president at analytics firm Spectra Markets, referring to the Reserve Bank of Australia's abandonment of its yield target in November.
Minutes from the Bank of Japan's March meeting published on Tuesday showed policymakers stressing the need to keep monetary policy ultra-loose, even as some of them saw signs of growing inflationary pressure.
Yet economists see building pressure for a shift if persistent yen weakness exacerbates inflation by raising import costs, particularly for energy, and reckon that 125, roughly where dollar/yen peaked in 2015, is a key level.
"Japanese yen depreciation is a big problem for the Japanese economy, because the economy - especially households - is facing rising inflation and yen depreciation could accelerate that," said Kentaro Koyama, chief economist at Deutsche Bank in Tokyo.
"If the dollar/yen rate exceeded 125 I'd expect some more severe verbal intervention."
Japanese Finance Minister Shunichi Suzuki said on Tuesday that Japan will carefully watch foreign exchange market movement to avoid "bad yen weakening".
Among other majors the New Zealand dollar was a fraction weaker at $0.6889 and sterling was under pressure at $1.3081.
European consumer confidence data and U.S. job openings figures are due later in the day.
Currency bid prices at 0105 GMT
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Euro/Dollar
$1.0975 $1.0988 -0.10% -3.45% +1.0998 +1.0969
Dollar/Yen
123.8750 123.8650 +0.20% +7.91% +124.3000 +123.4000
Euro/Yen
135.98 136.13 -0.11% +4.34% +136.5100 +135.5400
Dollar/Swiss
0.9342 0.9345 -0.02% +2.43% +0.9356 +0.9334
Sterling/Dollar
1.3083 1.3095 -0.10% -3.27% +1.3106 +1.3080
Dollar/Canadian
1.2522 1.2517 +0.04% -0.96% +1.2530 +1.2515
Aussie/Dollar
0.7479 0.7492 -0.16% +2.90% +0.7507 +0.7475
NZ
Dollar/Dollar 0.6891 0.6897 -0.07% +0.69% +0.6908 +0.6889
All spots
Tokyo spots
Europe spots
Volatilities
Tokyo Forex market info from BOJ
