Japanese Yen Is in Imminent Economic Shift

The Japanese Yen is in a state of flux, and it's essential to understand the reasons behind this shift. The country's economic growth has been sluggish for years, with a shrinking workforce and a rapidly aging population.

The Bank of Japan's monetary policy has been a key factor in this economic stagnation. By keeping interest rates low, the central bank has inadvertently created a culture of risk aversion among investors.

As a result, Japanese companies have been slow to invest and innovate, preferring to stick with tried-and-true methods rather than taking bold risks. This has led to a lack of competition and innovation in the Japanese economy.

The Japanese government has been trying to address this issue through various policies, but progress has been slow.

The Japanese yen's decline can be attributed to the significant difference in interest rates between Japan and the US. The US Federal Reserve has aggressively raised its main interest rate from 0.25% to 3.25% since March.

Higher interest rates in the US make the dollar more attractive to investors, leading to a decrease in demand for currencies with lower rates, such as the yen. This reduced demand causes the yen to fall in value.

The yen's slide has been driven by the difference between interest rates in Japan and the US. Since March, the US Federal Reserve has aggressively raised its main interest rate - from 0.25% to 3.25% - as it tries to tackle the rising cost of living.

Higher interest rates make a currency more attractive to investors, leading to less demand for currencies from countries with lower rates and causing their value to fall.

This is exactly what's happening with the yen, which has seen its value drop due to Japan's lower interest rates compared to the US. The US Fed's recent signals have also dampened expectations that significant interest rate cuts are on the cards this year amid persistently stubborn inflation.

The result is a weaker yen, which has both positive and negative effects on the economy.

The yen's decline is not a new phenomenon, but rather a continuation of a trend that started in early 2021. The currency has lost over one-third of its value in the last three years.

It's a remarkable drop, and one that brings the yen back to its pre-1990s levels. The currency collapsed following a huge asset bubble burst in the early 1990s.

Japan's economy has been struggling with stagnation, known as the "lost decades", which has led to low interest rates. The Bank of Japan (BOJ) has maintained rock-bottom borrowing costs to try and shake the economy out of this stagnation.

Although the BOJ recently hiked the benchmark rate for the first time in 17 years, Japan's economy remains an outlier globally.

Japan is facing a unique economic situation, with a weak economy that's struggling to handle higher interest rates. BOJ governor Haruhiko Kuroda has repeatedly said that the economy is too weak to handle higher interest rates.

Japanese consumers are struggling with rising inflation, but surprisingly, policy makers are welcoming it. This is because they've long wanted prices to rise.

The BOJ's current policy is necessary to help Japan reach its 2% inflation target, according to Mr Kuroda. Japan has faced deflation, or falling prices, for years, which is bad for an economy.

Consumers tend to hold back on buying big ticket items when prices keep dropping, expecting them to be cheaper in the future.

The weak Japanese yen has far-reaching effects on the economy and people. Japan is the world's most indebted nation, with an economy that has hardly grown in the last three decades.

The country's reliance on imported oil and gas means that rising energy prices, combined with weak exchange rates, have led to a 46% increase in imports last month. This is a major blow to consumers, who have seen their purchasing power halved over the last decade.

The weak yen has far-reaching consequences for both consumers and businesses in Japan. The country relies heavily on imported oil and gas, and with the weak yen, the amount of money it spent on imports last month jumped by 46%.

Japanese consumers 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.

The weak yen makes everything Japan buys more expensive, which is a major problem because average salaries in Japan have hardly risen in over three decades.

However, exporters have benefited from the weak yen, as the money they make abroad is worth a lot more back home. Exports account for about 15% of the country's total economic activity, which is not insignificant.

Japan's consumers have a hard time paying for things overseas, for example when they travel or their children study abroad, because the weak yen has reduced their purchasing power.

Japan's currency is sliding in value, which makes the country more attractive to tourists. Their holiday money goes further, which is a big plus.

In 2019, Japan welcomed 32 million foreign visitors, who spent about 5 trillion yen. Tourist numbers are still a long way from that level, but investment bank Goldman Sachs predicts inbound spending could reach 6.6tn yen within a year of the country fully reopening.