Why the Yen Is So Weak and What That Means for Japan: QuickTake

Yen banknotes. (Shoko Takayasu/Bloomberg)

(Bloomberg) -- The yen continues to languish near its lowest level against the dollar since 1986, mainly because interest rates in Japan remain much lower than those in the US and elsewhere, diminishing the currency’s relative allure. After several failed efforts by Japanese officials to talk the yen higher, the government moved more decisively as the yen breached the 160 level versus the dollar in late April, conducting its biggest ever intervention. Without specifying the precise timing, the finance ministry said it spent ¥9.8 trillion ($60.7 billion) to support Japan’s currency.

1. Why is the yen so weak? 

The yen has been the worst performer against the dollar this year among major currencies, falling about 13%. That’s mainly because of the wide gap in interest rates between Japan and the US. Even after the first interest rate hike in 17 years, Japan’s new policy setting is by far the lowest in the developed world, at a range of between 0% and 0.1%. Federal Reserve officials have kept the US benchmark federal funds rate in a range of 5.25% to 5.5%. That’s a major gap favoring investments in the US and therefore the dollar. The gap is likely to stay intact longer than previously expected because the Fed has been cautious about premature rate cuts even as the US labor market shows signs of cooling. 

2. Will the yen stay weak or rebound?

That will largely depend on the trajectory of the interest rate gap. The Fed has delayed rate cuts and the Bank of Japan’s governor, Kazuo Ueda, has said its inflation goal hasn’t been securely achieved yet, even though it has hovered at or above the BOJ’s 2% target for more than two years. That means he’s unlikely to raise rates fast or by a lot, limiting a possible rebound of the yen. Yet the yen’s slide raises the risk of fueling inflation further by making imports more expensive and putting more strain on companies and consumers.

3. What does the weak yen mean for the economy? 

Generally, a weaker yen helps large Japanese companies with global operations because it increases the value of repatriated overseas profits. A weak currency can also help tourism by boosting the buying power of incoming travelers. Japan hosted a record number of tourists in March as the country saw an early start to the cherry blossom season. On the downside, a soft yen makes imports of energy and food more expensive, hitting consumers. The nation’s largest umbrella group of unions announced the largest wage hikes in more than three decades for the current fiscal year. Wage gains exceeding inflation may give consumers more confidence about spending. 

4. How did Japan step in to prop up the yen?

While Japanese authorities didn’t immediately disclose details of the timing, they eventually acknowledged that they intervened. Trading patterns indicate the first intervention took place on April 29, after the yen hit 160 against the dollar for the first time since 1990. A sharp rebound in the yen later in the day fed speculation that Japan had stepped back into markets to support its currency. The second round appeared to take place two days later, at the end of the US trading day, following the conclusion of the Fed’s two-day meeting and in thin market liquidity. The impact of currency buying proved short-lived as the yen fell close to 162 in July, hitting its lowest level since 1986. 

5. What’s next for the BOJ? 

One third of surveyed BOJ watchers forecast the central bank will raise rates on July 31, while many others see a risk of such a move. The economy has contracted in the first three months of this year with consumer spending having fallen for four consecutive quarters, the longest stretch of retreats since the global financial crisis. Recent economic data haven’t shown a strong rebound in consumption. 

--With assistance from Aline Oyamada.

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