Yen’s weakness casts a pall over Japan’s economy

A big fall in value of the yen is casting a pall over the Japanese economy, which is already facing significant pressure from the pandemic and the Russian invasion of Ukraine.

The yen dipped to a nearly seven-year low on Monday, plunging to the ¥125 line after the Bank of Japan intervened to prevent government bond yields from rising.

The move by the BOJ prompted investors to sell the yen amid expectations that the interest rate gap between Japan and the United States would widen, as the Federal Reserve is gearing up for more rate hikes. The yen’s value against the U.S. dollar has dropped more than 7% so far this year.

“We will monitor the trends in foreign exchange markets, including the recent fall in the yen, and how it will affect the Japanese economy with a sense of urgency,” said Chief Cabinet Secretary Hirokazu Matsuno on Tuesday.

“It is up to the BOJ to decide specific approaches to monetary policy, but we expect that (the BOJ) will cooperate with the government to take necessary steps.”

Finance Minister Shunichi Suzuki echoed Matsuno, saying that a “bad” weakening of the yen needs to be avoided.

Also Tuesday, Masato Kanda, vice minister of finance for international affairs, and Andy Baukol, acting U.S. Treasury undersecretary for international affairs, agreed that the two countries will closely communicate on currency trends.

Economists have warned that the trend of a weak yen is expected to last for some time, as the BOJ appears to be sticking to its dovish stance even though central banks in other nations are set to raise interest rates to contain inflation.

“Inflation in Japan is not expected to accelerate as much as it has in the U.S. and Europe, so it’s hard to imagine that the BOJ would tighten its monetary policy. The weakness of the yen stemming from the Japan-U.S. interest rate gap will likely continue,” said Wakaba Kobayashi, an economist at the Daiwa Institute of Research.

The fact that Japan has continued to post trade and current account deficits will also add to pressure on the yen.

Conventionally, a weak yen is believed to bring positive effects to the Japanese economy, as it helps exports. Last week, BOJ Gov. Haruhiko Kuroda said this theory remains unchanged.

However, the current global economic landscape is quite different due to the pandemic and the Russia-Ukraine war, which are reducing some of the benefits of a depreciated yen, economists said.

“We need to keep in mind that rules of thumb don’t necessarily apply to the current Japanese economy,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies.

He said it is generally true that a lower yen is a plus for the overall Japanese economy, as it helps exporters boost their profits and attracts more international tourists.

But the manufacturing industry has been troubled by pandemic-related supply constraints, such as those over semiconductors. Major Japanese automakers have been forced to cut production and reduce their exports.

Moreover, Japan eased its strict border controls earlier this month, allowing new entries of foreign workers and students, but there is no sign that tourists will be given the green light to enter anytime soon.

“Considering the current situation, it’s unlikely that the quantity of exports and inbound tourism will show a significant recovery,” said Sakai.

While supply constraints are negatively affecting exports of manufactured goods, the weak currency still helps exporters earn more from overseas markets once those transactions are converted into yen, boosting their profit.

“But the question is whether companies will really increase capital expenditure and wages in the domestic market. As the domestic and overseas economies face increased uncertainties from the Ukraine crisis … it’s probably tough for companies to do so,” said Sakai.

Kobayashi of the Daiwa Institute of Research pointed out that while a weak yen is basically a positive factor for the Japanese economy, recently the spotlight has tended to be focused on its downsides that tie in with the pandemic-linked headaches.

What’s more, with the Ukraine conflict inflicting severe damage to the global economy by driving up commodity prices and further stimulating an existing inflationary trend, the yen’s devaluation is mostly seen as an extra burden on top of already high prices for energy and other imported goods.

According to government data, the value of imports surged 34% from a year earlier in February to ¥7.9 trillion, with the cost of crude oil nearly doubling and liquefied natural gas increasing about 65%.

Sakai said the primary factor pushing up import costs is actually soaring commodity prices rather than the lower yen.

He said the exchange rate accounts for about one-quarter of the increased costs, while the rest is attributed to rising commodity prices together with high demand and geopolitical risks.

Economists added that while the falling yen could indeed pose economic risks, policymakers should focus on mitigating the damage from the rising commodity prices, since their impact is much bigger.

“Burdens on companies and consumers won’t really be alleviated even if the weak yen is fixed,” said Kobayashi. “I think it’s better to focus on cushioning the impact of rising energy and material costs.”

Information from Kyodo added