Understanding the Japanese Yen Collapse and Its Global Implications

The Japanese yen collapse has sent shockwaves around the world, with many wondering what this means for their investments and daily lives.

The yen's value has plummeted to historic lows, making imports more expensive and potentially leading to inflation.

This collapse is largely due to the Bank of Japan's decision to keep interest rates low, making the yen less attractive to investors.

As a result, the yen's value has fallen sharply against other major currencies, including the US dollar and the euro.

The yen's collapse has significant implications for Japan's economy, including higher import costs and potentially reduced consumer spending.

The Japanese yen collapse has been a complex issue with far-reaching consequences. The main cause of the collapse is the country's massive trade deficit, which has led to a significant decrease in the value of the yen.

A trade deficit of over $100 billion in 2020, largely due to a decline in exports, has put pressure on the yen. The deficit has been fueled by a strong US dollar and a decline in global demand for Japanese goods.

The effects of the yen collapse have been severe, with inflation rising to 2.5% in 2022, the highest in over 20 years. The rising cost of living has put a strain on Japanese households and businesses.

The yen's value has plummeted by over 20% against the US dollar in the past year, making imports more expensive and further exacerbating the trade deficit. This has led to a decrease in consumer spending and a slowdown in economic growth.

The Bank of Japan's inability to control inflation has contributed to the yen's decline, as investors have lost confidence in the central bank's ability to manage the economy. This has led to a decrease in foreign investment in Japan and a subsequent decline in the yen's value.

The Japanese yen collapse can have a significant impact on global markets, making it harder for companies and governments outside Japan to access funding due to reduced global liquidity. This can lead to increased volatility and reduced availability of credit.

Currency volatility is a major concern, as a sudden appreciation of the yen can create a ripple effect across global financial systems. This can affect other major currencies, making it difficult for investors to predict market trends.

A carry unwind can also lead to stock market pressure, particularly for Japanese exporters, who may see their goods become more expensive abroad, potentially leading to declines in Japanese stock indices. This can have a knock-on effect on global markets, given Japan's significant role in the global economy.

Here are some key areas that may be affected by a Japanese yen collapse:

A market crash in a day is a rare and unsettling event. On August 5, 2024, global markets were shaken as Japan's Topix and Nikkei 225 indexes plummeted more than 12%, the steepest single-day drop since 1987.

The S&P 500 also fell by 3% on the same day, evoking memories of the infamous "Black Monday" on October 19, 1987, when the Dow plunged 22.6% and the Nikkei 225 dropped 14.9%.

The timing of this crash was particularly alarming, as the S&P 500 had recently hit a historic high, with a price-to-earnings (P/E) ratio exceeding 29, well above its long-term average of around 16.

The S&P 500 P/E ratio had been a topic of discussion for some time, with many warning of a potential speculative bubble. The appearance of an inverted yield curve in 2022, often a precursor to recessions, added to the growing fears of an economic downturn.

A key question remains: What triggered the crash?

The weak yen has a significant impact on consumers and businesses in Japan. The country's reliance on imported oil and gas means that the weak yen makes these essential resources more expensive.

The amount of money Japan spent on imports last month jumped by 46% due to exchange rates and rising energy prices. This is a major concern for consumers, who have seen their purchasing power halved over the last decade.

Ten years ago, 10,000 yen would buy an item worth $132, but today it only gets you something worth $67. This is a stark reality for Japanese consumers, who are struggling to make ends meet.

Average salaries in Japan have hardly risen in over three decades, making it even harder for consumers to cope with the weak yen. The country's exporters, however, are benefiting from the weak yen, as the money they make abroad is worth a lot more back home.

The carry trade strategy can be highly profitable, but it's vulnerable to sudden market shifts.

The Bank of Japan's unexpected rate hike on July 31, 2024, put pressure on carry trades funded by the yen, immediately threatening their profitability.

A rapid appreciation of the yen can trigger a massive unwinding of carry trades, as investors quickly exit the strategy to avoid further losses.

Between July 29 and August 5, the Japanese yen appreciated by approximately 6.15%, rising from 0.0065 to 0.0069 USD per JPY.

The use of financial leverage, including FX forwards and futures, can amplify returns but also accelerates the unwinding process when the market turns against carry traders.

Margin calls force investors to close positions at a loss, creating a vicious cycle of forced selling and further currency appreciation.

The collapse of the carry trade strategy led to a collapse in the stock market, particularly for Japanese exporters who benefited from a weaker yen.

Japan has stepped in to prop up the yen, spending $21bn last month to try and stabilize the currency. This intervention was reportedly followed by another estimated $37bn intervention, although the Japanese government has refused to confirm it.

The attempts to prop up the yen have so far had only short-term effects, with experts warning that they will only ever have a limited impact. Eisuke Sakakibara, a former senior official at Japan's finance ministry, said that these efforts are "to show the position of the Japanese government that it doesn't want any further weakening of Japanese yen."

The Japanese government has stated that it will take necessary actions to stop the yen's bleeding, with Finance Minister Shunichi Suzuki saying that they are "watching moves with a high sense of urgency, analyzing the factors behind the moves, and will take necessary actions."

Japan's central bank, the Bank of Japan, has been hesitant to raise interest rates due to the country's weak economy.

BOJ governor Haruhiko Kuroda has repeatedly said the economy is too weak to handle higher interest rates.

Rising inflation in Japan is actually a welcome change for policymakers, who have long wanted to see prices increase.

Japan has faced deflation, or falling prices, for years, which is bad for an economy because consumers tend to hold back on buying big ticket items.

The Bank of Japan's current policy is necessary to help it reach its 2% inflation target, according to Kuroda.

The yen started to fall in value in Japan, but people didn't feel much of an effect because Japan's borders were still shut at the time.

The yen is losing value mainly due to a "product of divergent monetary policy" between the Bank of Japan and its developed-market peers.

This is the result of a wide difference in interest rates between the U.S. and Japan, with the Bank of Japan only just beginning to ease off intense monetary stimulus.

The Bank of Japan has attempted to "normalize monetary policy" by lifting its benchmark interest rate out of negative territory, but these efforts have been dwarfed by the Fed's interest-rate hikes starting in 2022.

The interest rate gap reflects the very different inflation environments in the U.S. and Japan, with Japan struggling to get prices and wages to rise after decades of economic stagnation.

Japan has already intervened in the global currency market to prop up the yen, spending $21bn last month, but it only had a short-term effect.

The Japanese government has refused to confirm whether it intervened again, but traders saw signs of another intervention earlier this week.

Experts warn that these attempts will only have a short-term effect, and it's more of a show of the government's position that it doesn't want the yen to weaken further.

Japan's economy is too weak to handle higher interest rates, according to BOJ governor Haruhiko Kuroda, who has repeatedly said that the current policy is necessary to help the economy reach its 2% inflation target.

The Bank of Japan has only just begun to ease off intense monetary stimulus, while the Fed and other central banks are years into tightening cycles, creating a wide gap in interest rates that puts pressure on the yen.

The government is watching the situation with a high sense of urgency and will take necessary actions, but it's unclear whether these actions can reverse the yen's decline.

In fact, experts say that the slide won't stop until the Federal Reserve relents on its higher-for-longer policy path, which Japan has no control over.

The Japanese yen collapse has far-reaching consequences that can impact global markets in significant ways. A sudden appreciation of the yen can lead to increased currency volatility in the forex markets, affecting other major currencies and creating a ripple effect across global financial systems.

This increased volatility can make it harder and more expensive for companies and governments outside Japan to access funding, reducing global liquidity. As investors bring money back to Japan, it effectively withdraws capital from other global markets.

A carry unwind in the yen can hurt Japanese exporters by making their goods more expensive abroad, potentially leading to declines in Japanese stock indices. This can also affect global markets, given Japan's role in the global economy.

Here are some potential consequences of a Japanese yen collapse:

Japan's economy has hardly grown in the last three decades, leaving the country with a significant economic stagnation issue. This is largely due to its status as the world's most indebted nation.

The country's low birth rate and aging population have created a demographic time bomb, with the highest proportion of older people in the world. This has led to a need for foreign workers, but immigration is still a contentious issue.

Takeshi Fujimaki, a former adviser to billionaire investor George Soros, expects the Japanese currency to hit 180 against the US dollar before collapsing in value. This suggests a lack of confidence in the yen's strength.

The carry unwind in the Japanese yen has far-reaching implications for global markets. This can lead to increased currency volatility, affecting other major currencies and creating a ripple effect across global financial systems.

A sudden appreciation of the yen can withdraw capital from other global markets, decreasing global liquidity and making it harder for companies and governments outside Japan to access funding. This reduction in capital flow can increase volatility and reduce the availability of credit in global markets.

Yen strength can hurt Japanese exporters by making their goods more expensive abroad, leading to potential declines in Japanese stock indices. This can also affect global markets, given Japan's role in the global economy.

Commodity prices may become cheaper for Japanese buyers as the yen appreciates, potentially influencing global demand and prices for these commodities.

Here are some key implications of a carry unwind on global markets:

A carry unwind can signal broader market fears, leading to a more risk-averse environment. This shift can result in lower stock prices, increased demand for safe-haven assets, and higher volatility across asset classes.

Japan's currency is currently experiencing a sliding value, which is actually good news for tourists. This means their holiday money can go further in the country.

In 2019, Japan welcomed 32 million foreign visitors, who spent a significant amount of money. They spent about 5 trillion yen, which is equivalent to $33.6 billion or £29.7 billion.

Investment bank Goldman Sachs predicts that inbound spending could reach 6.6 trillion yen within a year of the country fully reopening.