**Japanese Yen Weakness: An In-Depth Examination of Its Decline and Potential Impacts**
*Originally reported by Louis Goss for LondonLovesBusiness*
The Japanese yen has seen a prolonged and significant depreciation in recent years, most notably against major global currencies like the US dollar. Its latest slide to a 34-year low has ignited fresh concerns among policymakers and investors alike. The declining yen has led to speculation over potential interventions by Japanese authorities, yet the route forward remains fraught with economic and geopolitical complexities.
This article offers an expanded and detailed analysis of the reasons behind the yen’s persistent weakness, the global and domestic factors driving its decline, the limited tools available to Japan for intervention, and the broader implications for markets and trade.
**Overview of the Yen’s Slide**
– The Japanese yen has been on a trajectory of weakening since the Bank of Japan (BoJ) initiated its ultra-accommodative monetary policy following years of deflation.
– In recent months, the yen has plunged to levels not seen since 1990, hitting as low as 151.97 against the US dollar on March 27, 2024.
– This marked its weakest exchange rate since July 1990.
– From January 1, 2021, the yen has fallen over 34 percent compared to the dollar, from around 103 JPY/USD to more than 151 JPY/USD.
Such a prolonged weakening of the currency is causing significant economic ramifications within Japan, especially related to imports and domestic purchasing power.
**Key Drivers Behind the Yen’s Weakness**
1. **Divergent Monetary Policies**
– The US Federal Reserve has adopted a tight monetary policy stance in recent years, aggressively raising interest rates to combat inflation.
– In contrast, the Bank of Japan has maintained ultra-low interest rates, only beginning to ease out of its unconventional policies recently.
– The sharp interest rate differentials between the Yen and the Dollar have attracted capital flows to the US, leading to increased demand for the dollar and reduced interest in the yen.
2. **Yield Curve Control and Negative Rates**
– The BoJ had maintained negative short-term interest rates and adopted a strict yield curve control policy until March 2024.
– These policies created an environment of cheap credit but also contributed to a lack of yield, which discouraged investment in yen-based assets.
– Even after Japan’s central bank lifted interest rates for the first time in 17 years in March 2024, the impact on bolstering the yen was minimal.
3. **Trade Deficits and Import Costs**
– Japan has been running a trade deficit, importing more goods than it exports.
– A weak yen exacerbates this by making imports, especially energy, more expensive.
– Japan, which imports almost all of its oil and gas, has seen its import bill rise, placing additional pressure on its economy.
4. **Investor Sentiment**
– Investors and currency traders perceive the yen as a low-yielding currency and have shown a tendency to use it in carry trades, where they borrow in yen and invest in higher-yielding currencies.
– This speculative activity places further downward pressure on the currency.
**Recent Central Bank Activity**
– In a landmark move in March 2024, the Bank of Japan raised rates for the first time in more than 17 years, a signal that it may begin normalizing its policy posture.
– However, this minor rate hike has not been sufficient to reverse broader market trends.
– BoJ Governor Kazuo Ueda indicated that further rate hikes will be incremental and conditional upon economic data, including wage growth and inflation patterns.
**Potential Policy Responses and FX Intervention**
Given the severity of the yen’s depreciation, Japanese authorities have been under pressure to act. However, the tools at their disposal are limited and subject to international scrutiny.
1. **Direct FX Intervention**
– Japan could intervene in currency markets by selling U.S
Explore this further here: USD/JPY trading.