The yen has fallen to its lowest level against the dollar in about 34 years, mainly because interest rates in Japan are much lower than those in other countries and regions, including the United States, making the yen less attractive in comparison. Japanese authorities have tried repeatedly to halt the yen's depreciation through verbal intervention but to no avail, and on April 29, monetary authorities are believed to have taken stronger measures, intervening to buy yen for the first time since 2022.
1. Why is the yen so weak?
The yen has been one of the worst performing major currencies against the dollar since the start of the year, dropping by over 10%. The main reason for this is the large interest rate differential between Japan and the US. The Bank of Japan has maintained its target for the policy interest rate, the overnight unsecured call rate, at 0-0.1%, the lowest among developed countries. The US monetary authorities have kept their target for the federal funds rate at 5.25-5.5%, creating a large interest rate differential that favors investment in the US and, ultimately, the dollar. With stronger-than-expected economic growth in the US and persistent inflationary pressures, expectations of an interest rate cut by the US monetary authorities have receded, and it is highly likely that the interest rate differential between Japan and the US will be maintained for longer than initially expected.
2. Will the yen remain weak or rebound?
This will depend heavily on the trend of interest rate differentials. With the U.S. Federal Reserve delaying the start of interest rate cuts, Bank of Japan Governor Kazuo Ueda has said that the bank may raise interest rates further if underlying price trends improve. However, Ueda also indicated that he believes the overall monetary environment will remain accommodative for the time being, making a rapid or significant rate hike unlikely. This means that even if the yen does rebound, it will likely only be limited. The Bank of Japan will hold its next monetary policy meeting on June 13-14.
3. What does a weak yen mean for the Japanese economy?
Generally, a weak yen is supportive for large Japanese companies that operate globally. This is because the value of yen increases when overseas profits are repatriated to the home country. A weak currency also boosts the tourism industry by increasing the purchasing power of tourists visiting Japan. Japan welcomed a record number of tourists in March, due in part to the early blooming of cherry blossoms. On the other hand, a weak yen will lead to higher import prices for energy and food, which will be a blow to consumers. According to the Japan Federation of Labor Unions (JFMU), this year's spring wage negotiations saw wage increases reach their highest level in 33 years. Wage increases that exceed the inflation rate may also increase consumer purchasing power. Prime Minister Fumio Kishida is also hopeful that a temporary flat-rate tax cut scheduled for June will also help support consumer sentiment.
4. Will Japanese monetary authorities intervene to buy yen?
The measures considered to be intervention were likely taken after the yen rose to the 160 yen per dollar level for the first time since 1990 in trading on April 29. The yen then recovered sharply, and speculation spread in the market that the authorities had intervened again. The Ministry of Finance refrained from commenting on the intervention, but a Bloomberg analysis of the Bank of Japan's forecasts for the factors behind changes in current account deposits on May 1, released the following day, and market estimates, suggests that yen-buying intervention may have been carried out.
5. What is the Bank of Japan's next move?
In a Bloomberg survey of economists, 41% said they expect the BOJ to next raise interest rates at its October meeting. The bank is analysing economic indicators to see whether strong wage growth will boost consumer spending. If that happens, it will be easier to raise interest rates again, as it can argue that resilient domestic demand, fuelled by wage increases, makes demand-led inflation sustainable. If spending doesn't pick up despite rising wages, the economy will lose momentum and it will be harder to justify another rate hike.
Source: From Yoshiaki Nohara, Bloomberg QuickTake, https://www.bloomberg.co.jp/news/articles/2024-05-01/SCRGKIT0G1KW00