By Ven Ram, Bloomberg Markets Live commentator and reporter
The global inflation narrative needs to stay on the front burner persistently for the yen to decline toward 150 per dollar, a level not seen in more than three decades. Specifically, five-year inflation-adjusted yield differentials between the dollar and yen need to at least double from around 181 basis points now for Japan’s currency to weaken toward the 150 zip code.
There are two paths for those spreads to widen: inflation stays stubbornly high in the U.S., forcing the markets to re-price the already-steep Federal Reserve’s policy trajectory; or alternatively, inflation expectations in Japan climb relatively faster and the Bank of Japan chooses to persist with its control of the domestic yield curve.
A widening of both real and nominal rate differentials underpinned the bulk of the 15% slump