Bank of Japan building

A number of world currencies have fallen sharply against the US dollar in recent months, showing the worst dynamics in many years. The phenomenon itself is a common story: during periods of upheaval, the dollar gains strength, while other banknotes lose weight. Standing out this time is the Japanese yen, which has fallen to its lowest since the 1990s, and it’s not over yet. I recalled the Asian crisis 25 years ago, which also began with the collapse of one of the regional currencies – the Thai baht. About whether a new economic emergency will arise in East Asia and what a sharp decline in the yen means – in the material of Izvestia.

Break through the minimum

This week, the yen fell to a 21st century low, breaking through 136 yen to the dollar. The last time such a level was recorded back in 1998. Since the beginning of June, the yen has fallen by 5%, and since the beginning of the year – by almost 20%. The decline was the steepest in recent decades, with all the previous shocks, there was no such rapid decline. Moreover, in past years, the yen, the traditional favorite carry tradesometimes, on the contrary, was almost the only currency that strengthened against the dollar during the onset and aggravation of some kind of crisis.

The decline in recent weeks has intensified against the backdrop of various statements by the country’s financial authorities, such as the benefits of a weak yen for Japanese business, but the reasons for it are fundamental. A whole group of factors led to the fact that the yen became one of the weakest currencies in 2022, and they began to act more or less simultaneously.

Bank of Japan building

Photo: REUTERS/Kim Kyung-Hoon

The first and foremost of these is the difference in monetary policy between the US Federal Reserve and the Bank of Japan. Under pressure from inflation, the US Federal Reserve has already raised the base rate by 0.75 percentage points. and promises to take a few more steps to increase it during this year. Against the background of the actions of various central banks, the Fed stands out for its decisiveness (inflation is completely unacceptable for the American economy that has become unaccustomed to it), while the Bank of Japan takes a completely opposite position.

The regulator continues to keep the base rate at the level 0.1%, and the rate on 10-year government bonds, thanks to constant interventions – at the level of 0.25%. Thus, the difference in the rate for ten-year bonds of Japan and the United States is almost 3 percentage points. No changes to this policy are planned for the foreseeable future.

Zero reaction

In other circumstances, even this might not be enough for such a strong decline in the yen. But there are other factors as well. In particular, the US economy, despite the decline in the first quarter, is still growing faster than the Japanese economy, if you count on an annualized basis. Japan’s GDP in 2021 increased by only 1.6%. In fact, the country’s economy did not experience any recovery after the pandemic, during which GDP fell by 4.5%. For comparison, the US economy grew by 5.7%. In 2022, Japan’s GDP will also not grow above 1.7%, and given the current situation, the forecast can be adjusted even lower. Other things being equal, the currency of a country with a slower economy tends to be weaker.

The same is observed in fiscal policy. The Japanese government is not going to reduce the budget deficit, while most other countries are moving away from stimulating the economy. Thus, the state continues to pump the markets with yen through both monetary and budgetary measures.


Photo: REUTERS/Yuka Obayashi

The sharp rise in fuel prices also could not but hit the Japanese currency. Many countries are dependent on energy imports, but few can compare with Japan, which, after the weakening of its nuclear industry due to the Fukushima nuclear accident, imports reached almost 90% of its energy balance. Naturally, the national currency also suffers from price fluctuations more than others, even the euro.

In general, the situation looks rather sad. Why is the Bank of Japan not reacting, although it would be in its power, if not to completely reverse the fall of the yen, then at least to stabilize it? In fact, the regulator, in its way of thinking, is somewhat similar to the Russian Central Bank, which has recently been conducting interventions mainly to curb the strengthening of the ruble.

Since the 1990s, Japan has been sticking to a weak yen, fearing problems for the national export industry. Taking into account the fact that from time immemorial the island state had a pronounced export-oriented economy, the logic of such actions can be understood. In fact, the government and the Japanese Central Bank hintedthat they can carry out a reverse intervention, but the market does not really believe them.

Advantage over neighbors

The fact is that the yen is currently updating the lows not only against the dollar, but also the Korean won and the Chinese yuan, and these are countries that are Japan’s main competitors in many markets. Thus, Japanese exporters gain an advantage over their closest rivals. Therefore, it is not surprising that analysts predict penetration dollar marks at 140 yen, after which some gestures from the Bank of Japan may really begin.


Photo: Global Look Press/Keystone Press Agency/James Matsumoto

The most important factor that allows regulators to treat the collapse of the national currency with some carelessness is inflation. Only at the end of May, for the first time in many years, it finally reached the target level of 2%. Against the background of the disasters that rising prices bring to the rest of the world, this is a mere trifle.

The underlying reasons for this discrepancy in inflation rates in seemingly comparable developed countries are the demographic situation in Japan (a huge number of pensioners), as well as the general propensity of the country’s population to save rather than spend, especially in an ambiguous economic situation. Now, however, there is a chance that a surge in the prices of fuel, food and other goods will still force the Japanese state to take inflation more seriously.

At one time the Asian crisis of 1997-1998 years started with a sharp fall in the Thai baht. Now a similar situation may arise: the endless “nightmare” of the yen by the Bank of Japan will lead to the fact that neighboring powers may decide that there is unfair competition, and bring down national currencies in turn. By evaluation investor Jim O’Neill, this could happen if it breaks 150 yen per dollar. The consequences of a new currency war in the midst of a series of shocks in the global economy will be extremely difficult to predict.

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