The Japanese Yen Hit 20-Year Low. Here’s What to Expect Next.
The yen has been weakening since 2021, and the slide started to widen in March 2022. The yen lost close to 30% of its value against the U.S. dollar by early September 2022, while losing roughly 20% and 22% versus the Taiwan dollar and Chinese yuan, respectively. As the yen falls to its lowest level in more than 20 years when compared to the U.S. dollar, the question on all investors’ minds is: will the trend remain negative and what are the major variables that will influence its course moving forward?
Yen Continues to Fall as Interest Rate Spread Widens
The fundamental cause for the yen’s dramatic depreciation is the expanding interest rate disparity between Japan and the United States, which is incentivizing money flow towards the higher-yielding U.S. dollar. The United States’ economy has been recovering from COVID-19 and prices have risen sharply in tandem as the economy woke up from its slumber. Since March 2021, the U.S inflation rate has been around 7-9% from January to August 2022, far beyond the Fed’s 2% target. To lower inflation to the target level, the Federal Open Market Committee (FOMC) launched a tightening strategy, raising interest rates a few times beginning in March 2022, although inflation has not yet reduced.
On the other hand, although prices in Japan continue to rise, they are still around 2-3%, not too far above the Bank of Japan’s 2% target. As the Bank of Japan expects domestic inflation to weaken, it maintains an accommodative monetary policy and has raised the magnitude of asset purchases several times to lower bond rates. The interest rate disparity between Japan and the United States has grown further as a result of the contradiction between Japan’s and the United States’ monetary policies, leading to a severe yen depreciation.
Yen’s Direction Depends on the Stance of BOJ and Japan’s Government, as well as U.S. Monetary Policies
While the yen’s depreciation is beneficial to exporters, the rise in the cost of imported food and energy has significantly increased the strain on people’s livelihoods in the face of sluggish income growth. Mr. Kuroda, President of the Bank of Japan, Mr. Suzuki, Finance Minister, Mr. Matsuno, Chief Cabinet Secretary, and Mr. Kihara, Deputy Chief Cabinet Secretary, have all expressed concern about the sharp decline in the yen and have stated that the central bank and government would work together to respond appropriately if necessary. On 22 September 2022, the Bank of Japan announced to maintain monetary easing to boost the economy’s recovery from pandemic. Following the announcement, the Japanese yen plunged to 145 against the U.S. dollar, then drastically rebound on the same day. The rebound was caused by the intervention by The Bank of Japan and the government who have sold dollars and bought yen in the foreign exchange market in order to curb the yen’s sharp fall. In retrospect, Japan’s government last intervened in the currency market in 1998, when the Asian financial crisis sparked a sell-off in the yen, and the government bought the yen to intervene in the market.
Furthermore, Mr. Kuroda, President of the Bank of Japan, will leave his position in March 2023, and is said to be unlikely to change monetary policy before he leaves. The U.S. inflation rate is high, and the Fed has suggested that it will maintain high interest rates in order to curb inflation. This means that interest rate differentials between Japan and the United States will remain wide, and the yen is projected to remain weak against the dollar for some time.
For overseas investors, the yen’s fall means that Japanese real estate is less expensive. Despite the fact that Japanese real estate prices have been growing for the past year or so, they are still approximately 10% cheaper in foreign currencies. Moreover, with further relaxation of the border restrictions in Japan, the yen’s depreciation would help encourage Japanese tourism and tourist spending in Japan, making now an excellent time for overseas investors to purchase Japanese real estate.
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