Yen Falls to Its Weakest Since 1986 as a Reformist Fed Chair Keeps the Dollar Firm

The Financial Times, in its outlook for the months ahead, named the combination now unsettling investors: a reformist new Federal Reserve chair, a weak Japanese yen, and a high-stakes earnings season. The three are connected through the price of the dollar.

Kevin Warsh, confirmed as chair of the Federal Reserve in May in a deeply divided Senate vote, has said inflation is "too high" and signaled that he wants to change how the Fed reads the economy. Some of his colleagues are weighing a rate increase rather than a cut. That hawkish turn has widened the interest-rate gap between the United States and Japan, and the yen has fallen to its weakest level against the dollar since 1986. Japan has spent roughly 74 billion dollars defending the currency, and investors say the real contest is with the Fed, not the market.

From Tokyo, the assessment is that the Bank of Japan has fallen behind on raising rates while higher energy costs from the Iran conflict raise the country's import bill. From a sound-money perspective, this is the mechanical result of two central banks pursuing different policies. Capital moves toward the currency with the higher interest rate, and a debtor government that keeps rates low to manage its borrowing costs pays for that choice through a weaker currency.