The Japanese Yen has been making a strong comeback against the US dollar over the last few weeks. Its strength is not unprecedented. It has been on a downward trajectory since the beginning of 2021. While the yen is not yet at a significant level, its weakness could accelerate inflation and raise import costs. This makes Japan’s economy more vulnerable to the effects of deflation.
As the yen has depreciated, Japanese wages have eroded, putting the country’s finances in jeopardy. Many Japanese investors are looking to buy overseas debt to boost their returns. The yen’s value is influenced by interest rate differentials, and the recent weakening of the currency is the result of this difference. The weaker yen makes everything in Japan more expensive, including utilities and food. In turn, consumers are hesitant to spend on big-ticket items. In addition, mass migration has led to severe labor shortages in most sectors.
The Bank of Japan has maintained ultra-low interest rates, but is unlikely to cut them any time soon. The yen has been supported by the BOJ’s intervention, which briefly lifted it to 142 against the dollar. However, it has settled back down to 140 to 1.
It’s important to note that the yen is not the only currency to suffer from the recent slide in interest rates. The Euro is also facing headwinds. Its rate differentials with the rest of the world have become even larger. In addition, the US twin deficit has caused some uncertainty in the European markets. These factors have increased the risk of a “dollar rally” in the early stages of the economic recovery.
Although Japan is not the only country to struggle with deflation, its population is the oldest in the world. With a large proportion of elderly people, the economy will face its demographic “time bomb” in the near future. The Japanese economy has barely grown in the past three decades. Its exports account for 15% of the country’s total economic activity. And it relies heavily on imported gas and oil. Its GDP narrowly surpassed forecasts in the third quarter.
Despite the recent weakness in the yen, it has not hit a level of 150 against the dollar since August 1990. In contrast, it has been weak against most of its major peers. This is due to the interest rate differential between the United States and Japan.
According to Takeshi Fujimaki, former adviser to George Soros, the yen is expected to reach 180 against the US dollar in the next few years. But he believes that the yen is undervalued, and that its strength is likely to end in a collapse. While a decline in the yen is not unprecedented, it is more likely to occur in an increasingly favorable environment.
Meanwhile, the Bank of Japan’s latest monetary policy announcement is set for Tuesday. While the BOJ has been steadfast in keeping its main interest rate below zero, its policymakers are reportedly mulling the possibility of raising it if the yen continues to depreciate. This would strengthen the yen and make it more attractive to investors.
