Summary:
- The Bank of Japan is anticipated to maintain its benchmark rate below zero on Friday.
- The yen’s value against the US dollar has fallen by more than a fifth just this year alone.
- Japanese consumers are experiencing rising inflation, but policymakers, who have long desired higher prices, are happy about it.
- Authorities spent $21 billion (£18.3 billion) last month to support the yen against the dollar.
- Japan’s economy is heavily reliant on imported energy and gas.
- Rising energy costs caused a 46% increase in the amount spent on imports last month.
- Exports make up about 15% of Japan’s economic activity, but their value has fallen by half in ten years.
Japan was the first major economy to lower interest rates to zero at the turn of the century as Japanese consumer prices rise and the Yen continues to fall.
Many other nations used that strategy to support their economies during the Covid pandemic.
These nations are once more raising interest rates, but the Bank of Japan (BOJ) is anticipated to maintain its benchmark rate below zero on Friday. Additionally, that harms its currency.
Investors have historically purchased the yen during times of crisis because it is long regarded as a haven currency.
However, that situation is currently precarious. Its value against the US dollar has fallen by more than a fifth just this year alone, bringing it to its lowest point since 1990.
Japanese Consumer Prices Rise: Why is this taking place?
The disparity between Japanese and US interest rates is what has caused the yen to decline.
In an effort to combat the rising cost of living, the US Federal Reserve has aggressively increased its key interest rate from 0.25% to 3.25% since March.
A currency typically becomes more appealing to investors when its interest rates are higher.
As a result, there is a decline in demand for currencies from nations with lower interest rates.
Economic inertia
However, some experts think that the weak yen is an accurate reflection of the nation’s financial situation.
In the past three decades, the economy has hardly expanded. It also has the highest level of debt in the entire world.
Japan also had the world’s lowest birth rate and the highest percentage of elderly people in its population, creating a demographic time bomb.
Even though the government has permitted some foreign workers to assist in problem-solving, there is still fierce opposition to immigration.
Former adviser to billionaire investor George Soros Takeshi Fujimaki asserts, “There is no reason for the yen to strengthen.”
As he has previously predicted, he anticipates the Japanese yen to reach 180 against the US dollar before eventually losing all of its value.
Will rates go up in Japan?
Haruhiko Kuroda, governor of the BOJ, has argued repeatedly that the economy is not strong enough to withstand higher interest rates.
Japanese consumers are experiencing rising inflation, much like the rest of the world, but policymakers, who have long desired higher prices, are happy about it.
According to Mr. Kuroda, the bank’s current approach is essential to achieving its 2% inflation target.
That’s because deflation, or falling prices, has plagued Japan for years. Deflation is bad for an economy because it causes people to put off purchasing expensive items because they anticipate lower prices in the future.
Japanese Consumer Prices Rise: How can Japan help?
Japan had not supported the yen by intervening in the world currency market in nearly 25 years.
However, authorities intervened last month as the currency fell, spending $21 billion (£18.3 billion).
It was beneficial for a brief period of time, but soon the currency fell once more, crossing 150 yen to the dollar.
Japan’s core consumer prices increased 3.0 percent year over year in September, the government reported on October 21, the highest level since 2014. Households were hard hit by the declining yen and rising energy prices.
Inflation has been particularly severe in Japan as a result of the weakening yen and rising energy costs.
This allegedly led to a new intervention, this time involving an estimated $37 billion.
Even though traders claimed they saw indications of another intervention earlier this week, the Japanese government has so far declined to confirm it intervened once more.
Experts have cautioned that these efforts to support the yen will always only have a temporary impact.
Eisuke Sakakibara, a former senior official in Japan’s finance ministry, explained the move this way: “It is to demonstrate the position of the Japanese government that it doesn’t want any further weakening of the Japanese yen.”
What does it imply for clients and companies?
Everything Japan purchases cost more as a result of the weak yen.
The nation is heavily reliant on imported gas and oil. Exchange rates and rising energy costs caused a 46% increase in the amount spent on imports last month.
However, there is some good news for businesses. Japanese exporters’ earnings abroad are much more valuable at home. This is significant because exports make up about 15% of the nation’s overall economic activity.
However, over the past ten years, the purchasing power of Japanese consumers has decreased by half. Today, 10,000 yen only buys you something worth $67 as opposed to $132 ten years ago.
Because average salaries in Japan have barely increased in more than three decades, this is a significant issue.
When people need to use the yen to make purchases abroad, such as when they travel or their kids are studying abroad, the problem becomes even more pressing.
Is this a good thing for travelers?
People in Japan did not notice much of a change when the value of the yen began to decline because the country’s borders were still closed.
However, since Japan has begun to welcome visitors, the country is becoming more appealing to travelers as their vacation funds go further.
32 million foreign visitors to Japan in 2019 brought in 5 trillion yen ($33.6 billion; £29.7 billion) in spending.
Even though the number of visitors is still far below that mark, investment bank Goldman Sachs forecasts that within a year of the nation’s full reopening, foreign spending could reach 6.6 trillion yen.
