For the last twelve months the value of the Japanese Yen has been on a journey of steady decline, with its currency steadily depreciating against other international currencies culminating in a near 32 year low.
On October 31st, the Yen fell to 151.30 against the Dollar or 183.40 to the Pound striking some major concerns in Japan as well as in the international markets. Due to the Yen’s weakness, imports are becoming more expensive, exports are not worth as much, which in turn fuels inflation hitting the entire populace.
While it’s very true that for those wishing to visit Japan there is no better time as you will get a lot more Yen for your money when exchanging and purchasing things abroad; however, for Japan, it poses a real concern for the economy and businesses, as well as the fact that there are seemingly few options that will remedy the situation.
The Bank of Japan (BoJ) has done very little to help the situation although Masato Kanda (the vice minister of finance for international affairs) states that “nothing is off the table” regarding possible solutions.
How did we get here?
The problems with the Japanese Yen comes from a number of different events that have occurred over recent years as well as some of its own economic decision making. One of the primary factors is Japan’s continued negative interest rate — the only country to have such.
From 2016, the plan was to keep interest rates at 0% and have an intentionally weaker but stable Yen that would promote economic growth through domestic consumer spending. What Japan did not foresee were the number of external events that would impact this: the Covid pandemic and the war with Ukraine for example that would lead to higher inflation.
Higher inflation means that prices go up and weakens the Yen further than was perhaps intended.
In the aftermath of these external events and with inflation hitting every major economy, many countries decided to raise interest rates that strengthen the currency — except Japan. In contrast the Bank of America’s interest rates have risen to near 5%.
This all tie’s in with investments and government bonds in which America with an interest rate of 5% is a lot more attractive. More investment in America and less in Japan further depreciating the Yen.
The problem is Japan is past the point of being able to increase its interest rates, as doing so would now worsen household and public finances as well burgeoning its existing debt.
So what happens now? The proverbial light at the end of the tunnel may depend on the continued disparity between the BoJ and the BoA’s interest rates; a lessening of which may improve the situation for Japan.
Yet, an intervention by the BoJ is much more likely in some form or another such as buying up international stocks of its Japanese Yen which it has done so in the past. It’s also a possibility that Tokyo itself could take its own measures beyond that of the BoJ.
In any case, the Japanese Yen turmoil is far from over.