The value of Japan’s currency has fallen significantly, returning its value to the level it was in 1990, just after Japan’s famous “bubble economy” burst. At one point on Monday, the dollar was trading at 160 yen. A few years ago, 1 dollar = nearly 100 yen.
The accelerating depreciation of the yen could ultimately be bad news for the Japanese people. A weak yen puts pressure on household budgets by increasing import costs. Japan is highly dependent on imports for both energy supplies and food, which could lead to higher inflation.
However, a weaker yen is a boon for Japanese exporters and for tourists visiting Japan who see their currency appreciate.
Why has the yen become so weak?
The yen has been in steady decline for more than three years, losing more than a third of its value since the start of 2021.
One factor behind the weaker yen is momentum. The yen is depreciating because investors are selling the yen, and because the yen is depreciating, investors are continuing to sell the yen. In such cases, the market enters a self-fulfilling loop.
As a result of the currency depreciation, exporters are reluctant to convert their foreign currency earnings into yen, further reducing demand.
But there are also important policy reasons for the currency’s sharp decline.
The Bank of Japan (BOJ) has kept interest rates unusually low for many years in order to increase bank lending and stimulate demand, as well as further inflation in the economy.
In February, faced with widespread labor shortages and a weak yen, Japan was overtaken by Germany as the world’s third-largest economy and fell into recession.
With low interest rates seen as the main factor behind the rapid depreciation of the yen, the Bank of Japan last month ended its policy of keeping the base interest rate below zero, increasing the short-term policy rate from -0.1% to zero -0.1%. raised between %. .
After this decision, the market focused on the pace of further rate hikes. On Friday, the Bank of Japan announced it would keep interest rates unchanged, suggesting further hikes are not imminent. This caused a further depreciation of the yen, further increasing pressure on the currency.
It was this wave of decline that caused the currency to drop to 160 yen to the dollar for the first time since 1990.
What effect does it have?
The weakest yen in decades means tourist dollars are higher than in generations, leading to a boom in the industry. Not only the US dollar, but also the yen is at multi-year lows against the euro, the Australian dollar, and the Chinese yuan (all of which are strong tourism markets for Japan).
In February, Japan recorded a monthly record of 2.79 million visitors.
However, domestic consumption remains a major weakness. Households tend to be net importers and face rising prices due to the weaker yen.
The weaker yen is also a factor in the decision of large Japanese investors to park their cash overseas, where they can earn higher returns. This trend is further exacerbated by the extraordinary strength of the US dollar, which means that US investments and assets yield much better returns for large financial institutions.
What are Japanese authorities doing?
In recent years, Japanese authorities have intervened to support the value of the currency. A weaker yen would make the goal of achieving sustainable inflation difficult, and a stronger yen could lead to an increase in domestic consumption and investment.
Japan intervened in the foreign exchange market three times in 2022, selling its reserves of US dollars and buying yen. At the time, Tokyo was estimated to have spent about $60 billion on currency defense.
On Monday, the yen briefly hit multi-decade lows before rising sharply, raising traders’ suspicions that Japan might step in to support the currency after weeks of threatening intervention.
Japan’s top currency diplomat, Masato Kanda, declined to comment when asked whether Tokyo authorities had intervened.
“Even if today’s move means intervention by the authorities, it doesn’t seem like a one-and-done move,” said Nicholas Chia, Asia macro strategist at Standard Chartered Bank in Singapore.
“We can probably expect more follow-through. [Japan’s Ministry of Finance] If the dollar/yen rises to 160 yen again. In some ways, the 160 level represents a distress threshold, or a new boundary, for authorities. ”
Reuters contributed to this report
