The Japanese yen has been on a downward spiral, reaching its lowest point against the US dollar since the bursting of Japan’s “bubble economy” in 1990. This dramatic decline has significant implications for both Japanese households and businesses.
A Yen in Freefall: Tracing the Reasons
The yen has been steadily losing value for over three years, dropping by more than a third since the start of 2021. This decline has been driven by a combination of factors, both self-reinforcing and policy-driven.
Momentum and Market Psychology
The yen’s fall is fueled by a vicious cycle: investors are selling yen because it’s declining, and the decline further incentivizes more selling. This “self-fulfilling loop” creates a snowball effect, pushing the currency down further. As the yen weakens, exporters are less inclined to convert their foreign earnings into yen, further reducing demand for the currency.
Policy Choices and Their Impact
The Bank of Japan (BOJ) has pursued a policy of keeping interest rates exceptionally low to stimulate inflation and encourage lending. However, this strategy has inadvertently contributed to the yen’s rapid decline. Low interest rates make the yen less attractive to investors seeking higher returns, leading them to shift their investments elsewhere. This has been particularly pronounced with the US dollar at its strongest in decades, offering enticing returns on American investments and assets.
In February, Japan’s economy slipped into recession and was overtaken by Germany as the world’s third-largest economy, adding to concerns about the yen’s weakness. Recognizing the potential damage of a rapidly depreciating currency, the BOJ last month ended its policy of keeping its benchmark interest rate below zero. This move, however, did not stop the yen’s slide. Despite raising its short-term policy rate, the BOJ announced on Friday that it would maintain interest rates at their current level, signaling that further increases were not imminent. This decision triggered another round of yen selloffs, pushing the currency down to 160 yen to the dollar, a level not seen since 1990.
The Fallout: Winners and Losers
The yen’s decline has created a mixed bag of consequences for different stakeholders.
Tourist Boom: A Silver Lining for Japan’s Tourism Sector
The weakening yen is a boon for Japan’s tourism industry. Tourists are finding their dollars, euros, and other currencies stretching further, leading to a surge in visitor numbers. Japan witnessed a record 2.79 million visitors in February, highlighting the positive impact of the yen’s fall on the tourism sector.
Domestic Concerns: Higher Prices and Shrinking Incomes
However, the weakening yen presents a significant challenge for Japanese households. As import prices rise, consumer spending power is eroded. Japan heavily relies on imports for energy and food, meaning inflation is likely to increase, squeezing household budgets.
The weak yen is also prompting Japanese investors to hold their cash abroad, where it can earn better returns. This trend, fueled by the strong US dollar, further exacerbates the yen’s decline.
Intervention and the Uncertain Future
The Japanese government is acutely aware of the challenges posed by a weak yen. It has intervened in the currency market on several occasions, selling US dollars to buy yen, in an attempt to prop up the currency’s value. These interventions have cost the government billions of dollars.
On Monday, after the yen reached its multi-decade low, it experienced a sharp rise, leading traders to believe that Japan had once again intervened to support its currency. While Japanese authorities have not explicitly confirmed their involvement, the potential for further intervention remains high. With the yen nearing the critical 160 level, the government is likely to act decisively if the currency continues to weaken.
The yen’s future trajectory remains uncertain. Whether the recent interventions will be sufficient to stabilize the currency remains to be seen. However, the recent developments underscore the significant challenges facing Japan as it navigates the complex interplay of global economic forces and domestic policy choices.
