The recent depreciation of the yen, has become a focal point of concern for Japan. As the value of the currency weakens against the U.S. dollar, alarm bells are ringing for Japan Inc. and consumers alike. Although the pace of decline may not mirror the drastic drop experienced last year, the prolonged period of the yen remaining at current levels has raised significant apprehensions. In this article, we will closely examine the implications of the yen’s fall on Japan’s economy, the challenges it presents, and the pivotal role the Bank of Japan (BOJ) plays in addressing these concerns.
Weakening Yen and Monetary Policies Highlight Challenges for Japan Inc. and Consumers
The weakening of the yen can be attributed to the divergence of monetary policies between Japan and its counterparts in the United States and Europe. Japanese authorities are closely monitoring foreign exchange developments, recognizing the importance of stable currency movements that reflect economic fundamentals. Bank of Japan Governor Kazuo Ueda has taken a neutral stance on the yen’s fall, acknowledging that it has positive implications for certain sectors while also negatively impacting others.
Impact on Consumers
Consumers are starting to feel the effects of the yen’s decline, as companies pass on higher import costs to them. Rising prices are becoming a burden on households, as Ueda himself has acknowledged. Although the yen’s depreciation may not be as rapid as previous interventions, analysts believe the trend will persist until there is confidence in the U.S. Federal Reserve and the European Central Bank pausing their interest rate hikes. If Japan’s inflation becomes more entrenched, it might prompt the Bank of Japan (BOJ) to consider adjusting its monetary policy.
The Outlook for the Yen
According to Koji Fukaya, a fellow at consulting firm Market Risk Advisory Co., the yen is expected to remain at current levels relative to the euro and the dollar until at least October. However, Fukaya also suggests that a reversal of the trend is possible thereafter, leading to a rise in the yen. The depreciation of the yen is already proving to be a headache for Japanese firms, particularly importers, as relative price levels remain high despite potential inflation slowdowns. Research firm Teikoku Databank reports that Japanese firms anticipate an average exchange rate of 127.61 yen to the dollar for fiscal year 2023.
Discrepancies Among Companies
The survey conducted by Teikoku Databank revealed discrepancies among Japanese companies regarding their assumed exchange rates. Importers, on average, set their exchange rate assumptions approximately 1.6 yen higher than exporters. The largest gap of over 7 yen was observed between wholesalers and construction companies. The Bank of Japan’s Tankan quarterly business survey, covering approximately 9,200 firms, showed that as of March, the assumed rate for the dollar-yen pair stood at 131.72 yen and the euro-yen at 138.29 yen. The central bank is set to release its next survey in July.
Market Sentiment and Economic Challenges
While markets in Japan have remained upbeat, with share prices reaching levels unseen in three decades and the yen weakening, experts caution against long-term optimism. Fukaya suggests that the current risk-on mood is unlikely to sustain itself over the medium term. Exporters stand to benefit from a weaker yen, as it inflates their overseas profits when converted into yen. Conversely, importers face the burden of higher costs, which have been further compounded by the recent depreciation of the yen. Additionally, the escalating fuel costs due to Russia’s war in Ukraine and the global economic recovery from the COVID-19 shock pose additional challenges for resource-poor Japan.
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BOJ’s Policy Considerations
Some analysts argue that Japan’s acceptance of a weaker yen is partially driven by the positive impact on stocks. However, there is an undeniable logic that higher cost burdens squeeze the overall economy. The Federal Reserve’s policy stance, aimed at raising interest rates, is likely to maintain the momentum for yen weakness. Market watchers urge vigilance regarding the potential scrapping of yield curve control in July when the BOJ releases its quarterly outlook report and possibly revises its inflation forecast. Although consumer inflation in Japan has remained above the BOJ’s 2 percent target for the 14th consecutive month, Governor Ueda has dismissed speculation of scaling back monetary stimulus due to the anticipated slowdown in inflation.
A BOJ board member suggested the need to consider revising the yield curve control program, which currently sets short-term interest rates at minus 0.1 percent and aims to guide 10-year Japanese government bond yields to around zero percent with a 0.5 percent cap. The member cited market functioning as a factor hindering the program’s effectiveness. Any rapid weakening of the yen, such as a drop toward 145 against the U.S. dollar in the short term, could potentially trigger an adjustment in the BOJ’s policies, as stability in yen movements aligns with the country’s economic fundamentals.
Past Intervention and Current Account Surplus
Japan’s intervention in the currency market in response to the yen breaching 145 against the U.S. dollar in September resulted in three yen-buying, dollar-selling operations carried out in September and October, amounting to over 9 trillion yen ($62.6 billion). The depreciation of the yen has also impacted Japan’s current account surplus. As a result, Japan has been removed from the U.S. watch list that monitors trading partners for potentially unfair foreign exchange practices, marking the first time since 2016.
Conclusion
The ongoing fall of the yen and the divergence of monetary policies between Japan and its peers pose significant challenges for Japan Inc. and consumers. As the yen weakens, import costs rise, leading to higher prices for consumers and placing burdens on households.
While exporters benefit from a weaker yen, importers face increased costs. The Bank of Japan is closely monitoring the situation and may need to adjust its monetary policy if inflation becomes more entrenched. The upcoming release of the BOJ’s outlook report and its potential revision of the inflation forecast in July will be crucial in shaping future policy decisions. As Japan navigates through these economic challenges, the stability of the yen remains a focal point for policymakers and market participants alike.
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