The recent weakening of the yen may not be so fast Like last year, when it lost around 20% of its value relative to the US dollar, but the prospect of it staying longer at current levels is already cause for alarm for Japan Inc. and consumers.
The yen is in the area of 143 against the US dollar, far from the 130 that the main Japanese companies expect the currency pair to reach on average in the current fiscal year until next March. The euro has also hit 15-year highs against the yen, near 157.
Although the Japanese authorities say they are closely monitoring the currency due to the importance of stable currency movements that reflect economic fundamentals, the recent weakness of the yen is largely due to the divergence of monetary policies between Japan and its US and European peers.
Bank of Japan Governor Kazuo Ueda has lately taken a neutral stance on the yen’s decline, calling it “positive for some sectors but negative for others”.
But consumers are feeling the lagged effects of the precipitous fall in the yen since last year, as companies continue to pass on rising import costs to consumers, and Ueda has acknowledged that the price hike is a “big load” for households.
The yen’s depreciation may not be as rapid as when the Japanese authorities intervened in late 2022, but analysts say the weak trend is likely to persist for months to come, at least until financial markets are convinced that the US Federal Reserve and the European Central Bank will pause raising interest rates.
Some say the weak yen may prompt the Bank of Japan to tweak its monetary policy if the country’s inflation takes hold.
“For now, the yen is expected to hold at current levels relative to the other two (euro and dollar), and it won’t be until October or later when we see a reversal of trend and the yen rises,” Koji says. Fukaya, a member of the consultancy Market Risk Advisory Co.
“That the dollar remains around 140 yen is already a headache for many Japanese companies, especially importers,” he added. “Inflation may slow down, but relative price levels will be high, and this hits households hard.”
Japanese companies expect the dollar to average 127.61 yen by fiscal 2023, according to research firm Teikoku Databank.
Among the 11,000 firms that gave valid responses, importers set their assumed exchange rate at around 1.6 yen above the average exporters, the survey showed, with the largest difference, of more than 7 yen, observed between wholesalers and construction companies.
In the Bank of Japan’s quarterly Tankan business survey, which covers some 9,200 companies, the expected exchange rate for the dollar-yen pair was 131.72 yen and for the euro-yen 138.29 yen in March. The central bank will publish its next survey in July.
For now, the markets are optimistic. Japan has seen share prices rise to levels not seen in three decades and the yen weaken, helped by the Bank of Japan’s ultra-low rate policy.
“Japan is one of the advanced economies less affected by headwinds, with a revival of inbound tourism and a fairly limited negative impact from COVID-19,” says Fukaya. “But the risk-on mood that has been seen recently will not last in the medium term.”
Exporters are often the main beneficiaries of a weak yen that inflates their earnings abroad in yen terms. On the opposite side, importers have to bear higher costs.
Russia’s war in Ukraine and the global economic recovery after the COVID-19 crisis have led to an increase in fuel costs. The recent depreciation of the yen exacerbates the problems of a resource-poor Japan.
Bank of Japan Governor Kazuo Ueda has lately taken a neutral stance on the yen’s decline, calling it “positive for some sectors but negative for others”.
“There are views that (Japan) accepts the weak yen in part because it is driving equities. But there is an undeniable logic that rising cost burdens put pressure on the economy as a whole,” said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc.
“The Fed’s policy stance (of seeking higher interest rates) may keep the momentum for yen weakness. With this in mind, we should watch for the release of yield curve control in July, when the Bank of Japan releases its quarterly outlook report and is likely to revise its inflation forecast upwards,” Maruyama added.
Consumer inflation is running well above the Bank of Japan’s 2% target for the 14th consecutive month, but the Bank of Japan, under the leadership of Ueda, who took office as governor in April, has repeatedly dismissed speculation about an early reduction in monetary stimulus, as inflation is expected to slow.
However, a Bank of Japan board member said that while it was appropriate to wait “a little longer,” the time had come to consider revising its yield curve control program as it hampered the functioning of the market. , according to the minutes of the central bank’s monetary policy meeting held in April.
The BOJ sets short-term interest rates at minus 0.1% and guides the 10-year Japanese government bond yield at around 0%, capped at 0.5%.
“Any rapid weakening of the yen, for example towards 145 (against the US dollar) in the short term, could trigger an early tightening of monetary policy, as the Bank of Japan favors a stable movement of the yen in line with the economic fundamentals,” said Daiju Aoki, Japan investment director at UBS SuMi TRUST Wealth Management.
Japan intervened in the foreign exchange market after the yen broke above 145 to the dollar in September. It carried out three operations of buying yen and selling dollars in September and October, spending more than 9 trillion yen (62.6 billion dollars).
As the weak yen also trimmed its current account surplus, Japan was removed from a US watch list that monitors trading partners for potentially unfair currency practices for the first time since 2016.
