Yen May Fall to 170 Per Dollar This Year on Fiscal Expansion, BOJ Delay

The Japanese yen, already hovering near a 40-year low, may weaken to 170 per dollar before the end of this year.

The dollar-yen exchange rate rose into the 162 yen range on June 30, its highest level since December 1986, Nikkei reported on July 6. Dollar strength eased temporarily after weak US employment data for June, but markets broadly expect the yen's downtrend to persist.

Japan's expansionary fiscal stance, the prospect of delayed rate hikes by the Bank of Japan and expectations for additional US rate increases are seen as the main drivers of yen weakness. Concerns are also growing that trust in Japanese government bonds and the yen could erode after language on fiscal consolidation was dropped from the government's latest economic and fiscal policy guidelines.

The government also added new wording calling for "appropriate monetary policy management to achieve a strong economy." Markets have taken that as a signal to hold back further BOJ rate hikes. If the central bank maintains its cautious stance, the US-Japan interest-rate gap could remain in place for longer and add to selling pressure on the yen.

Markets are watching for the Japanese government and the BOJ to step into the foreign-exchange market near 165 yen per dollar. Even if authorities intervene, such moves would likely only smooth sharp swings rather than reverse the broader weakening trend.

Some experts say the exchange rate could rise to 170 yen per dollar if authorities limit intervention even after the currency weakens beyond 165. Pressure on the yen could build further if Japan continues with consumption-tax cuts, fiscal expansion and delayed BOJ rate hikes while the US moves to tighten policy again.