Japanese Yen Weakens as Global Market Forces Take Hold

The Japanese yen has taken a hit in recent times, and it's all due to global market forces. The yen has weakened against the US dollar, reaching a 15-year low of 109.05 per dollar in August.

This decline can be attributed to a combination of factors, including a strong US economy and a dovish monetary policy. The US Federal Reserve's decision to cut interest rates has made the dollar less attractive, causing investors to seek out higher-yielding currencies.

As a result, the yen has become less desirable, leading to its weakening. This shift in investor sentiment has had a ripple effect on the global currency market.

Investors are now turning to higher-yielding currencies, such as the Australian dollar, to diversify their portfolios.

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The yen's decline is a result of several factors. One significant contributor is the gap between U.S. and Japanese interest rates, which has remained large due to the U.S. Federal Reserve's aggressive interest rate rises and the BOJ's slow pace in normalizing monetary policy.

This gap makes the yen less attractive compared to the dollar, leading to its decline. The U.S. Federal Reserve's actions have created an environment where the dollar is a more appealing investment option.

Japan's increased imports of fuel and raw materials have also contributed to the yen's decline. Companies are now converting yen into foreign currencies to make payments, reducing the demand for yen.

Many big Japanese manufacturers that shifted production overseas have reinvested profits abroad, rather than repatriating them. This reduced demand for yen further exacerbated its decline.

The weakening yen is having a significant impact on Japan's economy. Japan is experiencing a tourism boom, with a record 2.79 million visitors in February.

Tourist dollars are going further than they have in generations, thanks to the low value of the yen. This is leading to a surge in tourism revenue.

Domestic consumption, however, is not faring as well. Households are facing higher prices due to the weak yen.

The weak yen is also causing big Japanese investors to keep their cash abroad, where it can earn better returns. This trend is exacerbated by the strong US dollar.

As a result, American investments and assets are offering far better returns for major financial institutions.

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Japan's government has indeed stepped in to prop up the yen, with $21bn spent last month and another estimated $37bn this time around. Experts warn that these attempts will only have a short-term effect.

The Japanese government has refused to confirm the second intervention, but traders have reported seeing signs of it. Eisuke Sakakibara, a former senior official at Japan's finance ministry, said the government's goal is to show its position against further yen weakening.

Japan has intervened in the currency market three times in 2022, selling US dollars to buy yen and spending around $60bn in the process.

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Japan is unlikely to raise interest rates anytime soon, as BOJ governor Haruhiko Kuroda has repeatedly stated that the economy is too weak to handle higher interest rates.

The Bank of Japan's current policy of keeping interest rates low is necessary to help it reach its 2% inflation target, which is a crucial goal for the country's economic recovery.

For years, Japan has struggled with deflation, or falling prices, which is bad for an economy because it leads consumers to hold back on big purchases, expecting prices to drop further.

The yen's value is also being affected by the Bank of Japan's monetary policy, which is diverging from that of other developed-market peers, such as the Federal Reserve in the US.

The interest rate gap between the US and Japan is a significant factor, with the Fed having started raising interest rates in 2022, while the Bank of Japan has only just begun to ease off its intense monetary stimulus.

This gap has set up a "carry trade" for Japanese investors and institutions, which puts pressure on the yen and contributes to its ongoing decline in value.

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Japanese authorities have intervened in the global currency market to prop up the yen, spending billions of dollars to buy yen and sell US dollars.

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In 2022, Japan intervened in the currency market three times, selling US dollars it holds in reserve to buy yen, with Tokyo estimated to have spent around $60bn defending the currency at that time.

The Japanese government has refused to confirm whether it stepped in again to intervene, but traders reported seeing signs of another intervention earlier this week.

Experts have warned that these attempts to prop up the yen will only have a short-term effect, and that the currency will continue to weaken until the Federal Reserve relents on its higher-for-longer policy path.

Japan's top currency diplomat, Masato Kanda, declined to comment when asked if authorities in Tokyo had intervened, but Nicholas Chia, Asia macro strategist at Standard Chartered Bank, said that if the dollar/yen pair travels to 160 again, the authorities are likely to take further action.

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.

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A weak Japanese yen has both benefits and drawbacks.

A weak yen has actually benefited Japanese export firms, inflating their yen-based profits earned overseas and potentially leading to higher wages and consumption.

Tourism in Japan has also surged, with a cheaper yen making the country a more attractive destination for travelers, especially Chinese tourists who can pay less for things than they would at home.

A Big Mac costs 50% more in the next cheapest G10 currency, the New Zealand dollar, than it does in yen, making Japan a great value destination.

However, not everyone is feeling the benefits of a weak yen - many Japanese consumers are hurting from rising prices of imported goods and the high cost of traveling abroad.

The number of Japanese people traveling abroad has actually decreased, with just 9.62 million travelers last year, compared to 20.1 million in pre-pandemic 2019.

Japanese consumers accustomed to price stability are feeling the pain of a weak yen, with rising prices of imported goods and travel costs.

A weak yen has also made Japan a cheaper destination for travelers, with tourists spending about 5 trillion yen in 2019 and potentially reaching 6.6tn yen within a year of the country fully reopening.

To understand why the Japanese yen has weakened, we need to look back at Japan's economic history. Japan's economic miracle in the 1980s was a major turning point.

The yen was strong during this period, but it began to decline in the 1990s due to a combination of factors, including a major asset price bubble and a prolonged period of economic stagnation. This period is often referred to as Japan's "lost decade".

In 1997-1998, the Asian financial crisis had a significant impact on the global economy. The yen was pummeled during this time.

The Bank of Japan, or BOJ, intervened to support the yen. This intervention was a crucial move to stabilize the currency.

The Asian financial crisis highlighted the interconnectedness of global economies. Countries that were heavily invested in the region were affected by the crisis.

The BOJ's intervention in 1997-1998 was a key factor in mitigating the crisis's effects.

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In October and November 2011, the BOJ sold yen, just before a massive monetary expansion.

This action by the BOJ was a significant move in the financial markets, setting the stage for a major shift in monetary policy.

The BOJ's decision to sell yen was a deliberate attempt to weaken the currency and stimulate the economy.

This move was a precursor to the massive monetary expansion that followed, which had a profound impact on the global economy.

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In September and October 2022, the value of the yen was a major concern for Japan's economy.

The yen had fallen significantly, nearing 152 against the US dollar.

Japan's government intervened to stabilize the currency.