AFP, published on Wednesday 13 April 2022 at 13:06
The yen fell to a 20-year low against the dollar on Wednesday, weighed down mainly by the widening gap between Japan’s still very accommodative monetary policy and the Fed’s tightening in the face of US inflation.
A dollar traded for 126.05 yen around 10:15 a.m. GMT, having quickly passed 125.86 yen a few hours earlier, a first since 2002.
The yen has been declining against the dollar since early 2021, when US Treasury yields started rising sharply amid a strong recovery in US growth and the start of an acceleration in inflation in the country.
After the yen lost 10% of its value against the greenback last year, the yen has fallen again nearly 9% since the start of 2022.
Its depreciation has increased further in recent weeks, with the prospect of an even more aggressive monetary tightening by the US Federal Reserve (Fed) than originally expected to counter inflation in the United States to its 40-year high.
Going against the grain of the other major central banks, the Bank of Japan (BoJ) is maintaining its highly accommodative monetary policy, as the macroeconomic conditions for tightening are still not met in Japan.
BoJ Governor Haruhiko Kuroda also reconfirmed this rate on Wednesday, which appears to have sparked the yen’s new weakness.
– An ineffective “safe harbor” effect –
Japan’s economy is still fluctuating after the initial shock caused by the Covid pandemic in 2020, but inflation is much more moderate there than elsewhere (barely 0.6% excluding fresh produce in February), even if it is now also accelerating due to rising energy Prices.
The yen has traditionally been a “safe haven” in the event of severe market turbulence. For despite its appalling government debt (more than 260% of GDP according to the IMF), Japan appears to be a country with a strong backbone: it has been the world’s largest creditor for three decades, with a net worth abroad that weighed $3.6 trillion end of 2021, data from Japan’s Ministry of Finance shows.
However, this status has not worked since the beginning of the Russo-Ukrainian conflict, as rising energy prices widen the trade deficit of Japan, a major importer of hydrocarbons.
This will also cause the Japanese currency to fall as “oil importers have to pay in dollars and therefore buy dollars,” reminded AFP Masamichi Adachi, chief economist at UBS Securities in Japan.
But the BoJ continues to view yen weakness as an overall positive for the Japanese economy, notably by improving the price competitiveness of the country’s exports and boosting corporate profits as they convert their foreign earnings into yen.
However, this dogma, which the government also adheres to, has begun to be debated in Japan. Because the sharp drop in the yen combined with rising energy prices weakens small and medium-sized enterprises targeting the national market, as well as the purchasing power of households, whose consumption is already half-mast.
– Sudden movements “very problematic” –
Japanese politicians are increasingly concerned about the rapid decline of the national currency. “Exchange rate stability is important and we find sudden movements undesirable,” government spokesman Hirokazu Matsuno reiterated on Wednesday, following similar comments by Prime Minister Fumio Kishida the day before.
Japanese Finance Minister Shunichi Suzuki made it clear on Wednesday that such fluctuations were “very problematic”.
However, direct intervention from Tokyo with its foreign exchange reserves to support the yen seems difficult, economists say.
The US authorities “see positive about the appreciation of the dollar, because their problem is high inflation,” emphasized Mr. Adachi. This rules out a coordinated US-Japanese intervention, which would have a greater impact than a unilateral action by Tokyo.
Moreover, “it would be strange” if the Japanese government intervened by buying the yen while the BoJ left its extremely accommodative policy unchanged, Tohru Sasaki of JPMorgan Chase also noted, when polled by AFP.
