The weak yen has increased the cost of living for families across Japan. Tokyo may intervene but its impact may be limited.
The strengthening dollar, combined with the recent contraction of the Japanese economy, has dealt another huge blow to the already weak yen. The Japanese currency is now breaking every record, after slipping to 161.155 per dollar, a new low for the last 38 years. Shunichi Suzuki, Minister of Finance, expressed "deep concern" about an increasingly delicate situation that has been affecting Japan for at least two years.
The country has meanwhile appointed a new high-ranking diplomat for foreign exchange, raising the possibility of a possible intervention on the market to support the yen. Masato Kanda, the same one who launched the largest yen purchase intervention this year, has given way to Atsushi Mimura, as part of an annual reshuffle which however took place in a context that, to say the least not very particular.
“People know they are on a slippery slope when it comes to intervention (by the BOJ in support of the yen). But he also knows that the yen’s weakness is linked to rising Treasury yields and Japan’s slowness in raising rates. So even if Japan intervenes, the market will view the intervention as an opportunity to buy dollars,” wrote the Japanese newspaper Asahi Shimbun.
Overall, the BOJ will meet in late July and could raise borrowing costs, potentially helping to close the (huge) gap between Japanese and US rates. The same gap that has hit the yen hard throughout 2024, prompting investors to flock to the higher yields of U.S. bonds.
A lifesaver for the yen
The Japanese government won’t let the yen depreciate any further, and that’s because the weakness of the national currency has increased the cost of living for families across the country. A big mess for Prime Minister Fumio Kishida, eager to gather political support ahead of the leadership elections of his Liberal Democratic Party, scheduled for September.
Sure, the BOJ ended eight years of negative interest rates in March, but it was cautious about the prospect of further increases in Japanese borrowing costs. The yen’s rebound to 151.85 per dollar in early May following Japan’s earlier intervention in the market soon gave way to further weakening as investors focused on the huge gap between US and Japanese interest rates.
So what to do? The feeling is that, given the short-term impact of the BOJ’s action, any new interventions may have limited effects. And that, as long as the interest rate differential between the yen and the dollar is wide, the pressure on the Japanese currency will persist.
In short, Japan is learning a very difficult lesson at its expense: taming the dollar is almost impossible. Last May, Tokyo’s Finance Ministry used $59 billion to push the yen up from a historic intraday low of 160 to 153 per dollar. Within a very short time, however, the currency returned to trading at around 156 yen to the dollar.
Japan is trapped
If intervening to support the yen serves virtually no purpose, what should Japan do? First study the situation. The economic fundamentals that supported the dollar and dragged the yen lower are still in place. Although the BOJ’s decision in March to end negative rates caused controversy, the rate was only increased to 0.1%.
The bottom line is that, with stronger-than-expected inflation, the US Federal Reserve (FED) is keeping US rates sky high, and “bloated” US yields mean the dollar is set to put pressure on the yen and other currencies (at least until US rates fall).
In short, Japan needs a stronger yen. Given its economy’s growing dependence on energy and food imports, a currency that is not in free fall increases the country’s purchasing power on the international market and also supports household savings (crucial for Tokyo, considering that its population is aging and families are becoming increasingly dependent on their coffers). The problem therefore cannot be solved by the BOJ alone. Much depends on the moves of the FED, located on the other side of the ocean.
Original article published on Money.it Italy 2024-07-13 06:40:00. Original title: Lo yen continua a crollare. Cosa succede in Giappone?
