The Weakening Yen Indicates Challenges in Japan’s Economy

Japanese Yen and U.S. dollar banknotes are seen in this illustration taken on March 10, 2023. (Dado Ruvic/Reuters)

On Oct. 31, the Japanese yen exchange rate fell to 151.74 against the U.S. Dollar due to the Bank of Japan’s failure to adjust its monetary policy as expected. This led to the accelerated selling of the yen and the buying of U.S. dollars. Many believe that global instability is a big contributor to the rise of the dollar, and the yen may continue to depreciate. For Japan, this would mean an increase in the cost of imports, and it can lead to an economic downturn. However, many Japanese entrepreneurs view the depreciation of the yen as conducive to the growth of the Japanese economy.

On Oct. 31, the Bank of Japan (BoJ) allowed greater flexibility in its monetary policy and is looking to move towards a tighter monetary policy. However, investors in the New York market generally believe that Japan’s loose monetary policy will continue.

The BoJ kept its negative interest rate policy and will likely continue for quite a while. It is also increasingly unlikely for the Japanese government and the BoJ to intervene in the market. On the other hand, the U.S. Federal Reserve Board is maintaining high interest rates to curb price increases, and the U.S. Dollar remains strong in the current economic background. The contrast between the Japanese and the U.S. currencies is becoming apparent. Therefore, investors sold the yen and bought U.S. dollars, resulting in the yen on Oct. 31 falling to 1 U.S. dollar against 151 yen. At the start of the year, 1 U.S. dollar was 129 yen.

The Federal Reserve announced on Nov. 1 that it will keep interest rates unchanged, but it left the door open to future interest rate hikes to slow down inflation. Affected by this, the exchange rate remained at 1 U.S. dollar against 150 yen or so.

On the reasons for the depreciation of the yen, the University of South Carolina Aiken School of Business Professor Frank Xie told The Epoch Times: “I think the reason for U.S. interest rates remaining high is affected significantly by global instability and increased wars. Whenever there is a massive war in the world, the dollar rises, gold rises, and the U.S. military-industrial complex thrives. This should be the reason for the dollar’s appreciation.”

Regarding the future trend of the Japanese yen’s depreciation, Mr. Xie explained: “In addition to a strong U.S. Dollar, there are also other negative impacts on Japan’s economy. Russia’s restrictions on Japan’s energy are a significant factor. The depreciation of the yen will likely continue.” He also said that the depreciation of the yen will increase the cost of imports, which may also lead to an economic downturn.

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Japanese entrepreneur and China-Japan political and economic commentator Mr. Lu, on the other hand, said to The Epoch Times: “The depreciation of the yen is a trend that we expected Japan to do in order to revitalize the economy. This will likely continue for a fairly long period of time. The yen will be maintained at around 130‒150 yen against the U.S. Dollar. The Japanese economy simply cannot afford the appreciation of the yen. The depreciation of the yen is needed for the Japanese economy and is the economic policy of the Japanese government.”

Mr. Lu also said: “The depreciation of the yen will bring some inflation in the future. However, at present, Japan has welcomed the economic recovery and growth, especially in exports, which benefitted significantly from the depreciating currency. The dollar interest rate remains high, so the yen against the dollar will likely not fall. In addition, the purchasing power of the yen is also very strong. So it is unlikely to have issues.”

Background of the Yen Depreciation 

The BoJ decided at its monetary policy meeting on Oct. 31 that it would revise its controls on long-term and short-term interest rates, capping long-term interest rates at 1 percent but allowing them to exceed 1 percent by a certain margin. This is considered to be just a minimal adjustment. The Japanese central bank’s governor Kazuo Ueda in the press conference after the meeting also did not mention future plans to adjust the policy.

The BoJ released the “Outlook for the Economic Activity and Prices” (Outlook Report) on Oct. 31, forecasting that the annual increase in the Consumer Price Index (CPI) will be 2.8 percent in 2023 and 2024, with a small increase of 1.7 percent in 2025. As wages continue to rise, the relationship between wages and prices is expected to enter a healthy cycle by 2025. This is one of the reasons for not making monetary policy adjustments at this time.

In order to increase investments and stimulate growth, Japan has implemented a negative interest rate policy since February 2016, where local banks are charged 0.1 percent negative interest per annum on their deposits with the central bank that exceeds the required amount.

Although the BoJ did not announce the lifting of the negative interest rate policy at this meeting, market analysts believe that the lifting of the negative interest rate policy in Japan is not far away, as evidenced by the BoJ’s latest Outlook Report, and a decision may be made in January 2024 at the earliest.

Since the collapse of Japan’s bubble economy, the yen against the U.S. dollar has been repeatedly fluctuating. In 1980, it was 1 U.S. dollar against 226 yen and remained in the 200s until 1985. Since 1986, the yen had been steadily appreciating until 2008 when it reached 1 U.S. Dollar against 103 yen, and in 2012, it even rose to 79 yen. In 2014, the depreciation started again, returning to the 100 yen level, and basically remained at an average of about 110 yen to the dollar until 2021. In 2022, it depreciated sharply to 131 yen; and going into 2023, the yen continued to depreciate, reaching the current level of 1 U.S. Dollar against 151 yen.

Impact on Japan’s Economy

The depreciation of the yen is favorable to Japan’s exports, and it is good for export-oriented businesses, as they can sell their products abroad cheaply.

On Nov. 1, Toyota revised its original setting of $1 to 125 yen to $1 to 141 yen, which is expected to increase its earnings for the next period (until March 2024) by 50 percent. Other Japanese car manufacturers are doing the same.

The number of foreign tourists to Japan is also expected to increase, which will boost economic growth. In addition, Japanese companies abroad can convert the dollars they get abroad into more yen in their own country.

The depreciation of the yen is not favorable to imports. The cost of importing raw materials will increase accordingly. After the Russian invasion of Ukraine, the prices of oil, grains, etc. have risen and remain high. Under such circumstances, further depreciation of the yen will lead to an increase in the cost of imports, which will have an impact on businesses and the lives of the Japanese people.

Toyota’s president, Akio Toyoda, told a press conference in October last year that the negative impact of the depreciation of the yen is increasing due to the cost increase in imported materials and parts, as well as the increase in energy prices. Toyoda hopes that the yen will stabilize. In addition, Tadashi Yanai, president of Uniqlo Japan, also said that no one in the manufacturing industry is benefiting from the depreciation of the yen. On the contrary, the negative impact on the economy is becoming serious.