The Japanese Yen has declined to 145 in against the US Dollar. Yen was at the same level in November 2022, and Japan took action to bolster the Yen. Currently, investors anticipate intervention from the Japanese central bank at this critical level.
Nevertheless, Japan’s finance minister, Shunichi Suzuki, refrained from committing to an intervention. Instead, he stated that they are closely monitoring the situation and will only intervene if they perceive the decline to be excessive.
In my opinion, Japan may opt to let the Yen weaken further against the USD. This is primarily influenced by the interest rate discrepancy between the United States and Japan.
The United States has been increasing interest rates, and the recently appointed Fed Chair, Powell, has indicated the possibility of two or more rate hikes. The market has already factored in one rate hike but is unprepared for additional increases.
In contrast, Japan has maintained its interest rate at -0.1% since 2016.
Given the higher interest rates in the US, ranging from 5% to 5.25%, there is a greater appeal for depositing funds in USD, resulting in increased demand for the currency. Conversely, there is less incentive to deposit money in Yen, particularly when the interest rates are negative. As a result, the Yen tends to be spent or converted into other currencies.
Consequently, the USD strengthens while the JPY weakens, hence testing the 145 level once again.
Japan did not experience as high inflation rates as the United States. In June 2022, Japan’s inflation peaked slightly above 4%, while the US experienced inflation rates of more than 9%.
Japan is often cited as an example of a country grappling with prolonged deflation. Over the past 25 years, the inflation rate has mostly hovered close to zero for most of the time (see chart below.) Although there were occasional spikes, inflation rates could not be sustained, and the inflation rate consistently fell back to near-zero levels. Japan’s long-term objective is to achieve a sustainable 2% inflation rate.
Japan has already reduced interest rates to below 0%, but this measure did not yield significant results since the US was also maintaining rates close to zero. There was no significant interest rate disparity until now. Therefore, it is questionable why Japan would want to raise rates and risk a collapse in the inflation rate.
Hence, even if Japan intervenes, it would primarily be to prevent one-sided speculation or excessive dumping of the currency, rather than genuinely aiming to strengthen the Yen.
While it is true that import costs may rise, the current level of inflation is relatively low, minimizing the impact of this disadvantage.
Simultaneously, a weaker yen would provide a boost to Japan’s exports, benefiting globally recognized Japanese brands such as Toyota, Sony, Uniqlo, Nintendo, Daikin, and others. This growth in exports would contribute to the expansion of Japanese companies and support the overall Japanese economy.
Additionally, a more affordable yen would likely attract a greater number of tourists to Japan, leading to increased spending and further stimulating economic growth.
The depreciation of the yen has also fueled a surge in the Japanese stock market, with the Nikkei index reaching record highs. With a weakening yen and low interest rates, investors are more inclined to take on higher risks in search of greater returns. As a result, the stock market becomes an attractive investment destination, prompting the surge in stock prices. A vibrant capital market would also encourage increased economic activities, such as IPOs, mergers and acquisitions, which can help revitalize Japan’s economy from its prolonged stagnation.
Therefore, there are substantial benefits for Japan to have a weaker yen. It is difficult to understand why Japan would want to jeopardize this opportunity, as they have been waiting for such favorable conditions for the past 30 years. This presents a chance for Japan to enhance its baseline inflation rate and stimulate economic growth.
