【TEJ Dictionary】Depreciation of Japanese Yen

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Analysis of Japanese economy and Yen’s trend

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🔸Introduction🔸

Japanese Yen once depreciated to USD/JPY 130.202 on April 28th, which is the lowest within past 20 years. To boot, JPY/NTD was down to 0.2308, which is the lowest since August 1998. There is no evident hault of downside trend of Japanese Yen. According to media, BOJ Keep Unlimited QE to Repress Yield Going up. This is clear to understand that BOJ would not enter the market to stop depreciation of JPY. Today, let’s analyze the potential reason for the situation.

Note: Bank of Japan, BOJ, is the central bank of Japan.

🔸Highlights of this article🔸

  1. Interest Rate Gap between Japan and USA
  2. Would depreciation of JPY save economic growth?

1️⃣ FED’s Lifting Rate VS BOJ’s QE — Interest Rate Gap between USA and Japan

After the FED started raising interest rates, other central banks followed suit. For example, on March 17, Central Bank of Taiwan raised the policy interest rate by the same amount as that of FED, and the discount rate returned to the pre-epidemic level of 1.375%. This is the first time Central Bank of Taiwan has raised interest rates in more than a decade and a half years. However, BOJ insisted on maintaining low interest rates to support the Japanese economy. After the operation at the end of March,BOJ still maintained its determination of QE. BOJ declared an unlimited bond purchases at a fixed rate (10-year Treasury note) during April 21 to 26. Such a move by BOJ to forcibly lower long-term interest rates has led to an accelerated depreciation of the yen, which recently hit a new low against New Taiwan Dollar, NTD, in 25 years.

President of BOJ, Haruhiko Kuroda, said: “There is no need to raise interest rates at the moment to prevent inflation caused by a temporary rise in energy prices. The depreciation of the yen is positive for Japan’s overall economy.” On the other hand, he also said that the depreciation this time is too fast. After taking office, Kuroda has always maintained the monetary quantitative easing policy started in 2001, expecting that inflation rate would reach 2%. The market generally expects that after April, with the rise in raw material prices, the inflation target is expected to be achieved; however, since wages and market demand have not followed suit, Kuroda will continue the easing policy. Public believe that after the replacement of the president in April next year, it is possible to switch to austerity policies. In the case of the widening of the US-Japan interest rate gap during this period, the yen will depreciate at an accelerated rate. Japanese Finance Minister Shunichi Suzuki said on April 12: “The government will pay close attention to the movements of the FX market, including the recent decline in yen and its impact on Japanese economy.” He also stated that “the stability of the exchange rate is very important, and we do not want to see large fluctuations.”

2️⃣Abenomics — Would Depreciating Yen to Stimulate Export Benefit Economic Growth?

After Ex-Prime Minister Shinzo Abe took office on December 26, 2012, in order to get rid of Japan’s 15-year deflation predicament and revive the domestic economy, he proposed the Three Arrows Plan of Abenomics. The three major policies are (1) monetary easing policies (2) expand fiscal expenditure (3) reform structural economic growth strategy.

Since Japan launched the super quantitative easing policy in 2012, the exchange rate USD/JYP has depreciated by 28% from 2013 to 2014. The large-scale implementation of monetary quantitative easing has depreciated the yen, which is beneficial to export and drives economic growth; in addition, the weak yen would boost Nikkei 225 Index or stock market index, because nearly 45 percent of the index’s constituents are export-oriented technology stocks and auto industry. Therefore, a weaker yen helps those companies’ top-line performance.

The long-term depreciation of the yen has always been interpreted as a boost to the Japanese economy and can create a rise in stock prices, but the recent depreciation of the yen has not created higher stock prices for Japanese companies. This is because after the start of the Russian-Ukrainian war at the end of February , the rise in global energy prices has increased the import costs of Japanese companies, which in the case of Japan’s extremely low energy self-sufficiency rate has widened the trade deficit and contributed to the depreciation of the yen.

“Nihon Keizai Shimbun”, a mdium from Japan, further analyzed that in the past 10 years, Japan’s industrial competitiveness has decreased and the trade structure has quietly changed, which is also one of the reasons. Taking last year as an example, crude oil and liquefied gasoline ranked top 1 and 2 in Japan’s imports, but the top 3 to 5 were pharmaceuticals, semiconductors, and communication equipment. In February, YoY growth of core consumer price index (CPI) increased by 0.6%, rising for 6 consecutive months. It is also the largest increase in two years. The core CPI does not include fresh food, but includes energy costs. Energy prices surged 20.5% in February compared with the same period last year, which is the largest single-month increase since January 1981, is the main reason for pushing up the core CPI last month.

Japan’s economy returned to growth in the fourth quarter in 2021, with a quarterly growth rate of 5.4%. However, in 2022, in the face of rising prices in the overall market, is it possible for the Japanese people to continue to increase consumer spending? Once the economy does not grow as expected, we must be careful to prevent “Stagflation”; in addition, the continued rise in prices will further cause the country’s overall productivity to fall backwards, which will lead to rising unemployment, and even weaker companies may even go bankrupt. High inflation affects the distribution of wealth and distorts prices, and high unemployment continues to worsen. The argument that “The devaluation of yen is good for Japanese economy” is dated. Many Japanese companies have already deployed overseas, such as the automobile industry, and moved their factories overseas. Now they will not expand exports from Japan because of the depreciation of the yen.

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🔸Conclusion🔸

According to current situation, the depreciation of yen will continue. The current easing monetary policy has caused the US-Japan interest rate gap, and the Russian-Ukrainian war has caused fluctuations in global energy prices, furtherly, making unease in the international financial market. Global funds are flocking to “the safest currency”, USD. The USD index even soared to 100.32 on April 14, the highest record since May 2020. With the prolonged war between Russia and Ukraine, the impact on the market has become more profound. Greater demand for safe-haven currencies further contributed to the yen’s weakness. Sakakihara, also known as “Mr. Yen”, previously said that the yen would fall to 130 yen per dollar, and the Bank of Japan may intervene. However, the Bank of Japan has so far maintained its loose policy policy. Hence, we should keep constant attention on following changes to grasp the trend of foreign exchange. If you need to upgrade your database, do not hesitate sending your inquiries or ideas by phone or by email to us.

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