The USD/ JPY has seen unprecedented levels not seen since August 1998 surpassing the 140 per USD level as the US economy is pressured by entrenched inflation figures, as seen in figure (1) below. The Japanese government is warning the BOJ of the weakness of the currency and is calling for acting to counter the excessive declines in the JPY. Bank of Japan Governor Haruhiko Kuroda said that the fast movements within the currency “are undesirable as they destabilize corporate business plans and heighten uncertainty”.
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Figure 1: USD/ JPY Chart| Source: TradingView
The Bank of Japan has cut its FY 2022 GDP Growth forecast, while it revised it higher for the FY 2023 and 2024 from 1.9% to 2%, and from 1.1% to 1.3%, respectively. As seen below in figure (2), the bank also raised its expectations for the annual inflation rate in 2022 from 1.9% to 2.3% due to the global geopolitical tensions that are affecting energy and food prices, and as the Yen further weakens, prices are pushed upward furtherly.
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Figure 2: Actual and Forecasted Japanese Annual Inflation Rate (2018-2014) | Source: Trading Economics, Japanese Ministry of Internal Affairs and Communications
A weak JPY means that Japanese exports are cheaper for the world; thus, increasing the demand for Japanese goods. Meanwhile, a weaker currency translates into more expensive imports; hence, reducing the Japanese consumers’ purchasing power. On the other hand, a strong JPY means more expensive exports besides the already hurt export business due to the globally strained supply chain, lower competitive advantage, and less demand; thus, adversely affecting one of the biggest world exporters, while imports become cheaper and hence higher consumption.
The USD/ JPY is one of the most important currency pairs. Economic factors, political conditions and market psychology can all affect the price of a currency. One main factor affecting the pair’s recent depreciation is the divergence in policy between the Federal Reserve and the Bank of Japan. The USD/JPY pair has always been linked to carry trading, a strategy that entails borrowing at a low interest and converting the borrowed amount to another currency with a higher interest. Bank of Japan is known for its negative interest rate of -0.1% which it has maintained since 2016 as a tool to combat deflation, while the Federal Reserve is currently showing a hawkish tone and has already started its cycle of hiking interest rates and it is expected to keep on increasing the rates until the inflation figures becometh under control.It is not expected that inflation in Japan to increase to 1% until 2023. it is highly unlikely to see a rate hike with a further decline in the currency as per ING and HSBC expectations.
An expected move is to increase the interest rate slightly; however, the governor of the BOJ does not believe it would be an efficient move. He stated in July “It’s hard to believe that just by raising rates somewhat, you can stop the yen’s decline.” Analysts believe that any measures to appreciate the currency is unnecessary since there’s a wide gap between the Japanese interest rate and the rest of the world, and in the US in particular. But recently, the BoJ reaffirmed that it will not be hesitant to adopt more easing measures if necessary in a sign that it will continue to stand out among a worldwide tide of central banks tightening policy. The central bank also stated that, as it has been doing since April, it will continue to purchase limitless quantities of the bonds to preserve an implicit 0.25% cap each market day. With the weakened Yen, tourists would be attracted to visit the country; therefore, the government is also considering relaxing the measures previously taken at the time of the pandemic by removing the ceiling of daily visitors to the country with other further steps, according to a government official. Furthermore, not only the BOJ has vowed to intervene but also the government. The Japanese Finance Minister Shunichi Suzuki avowed that the country will take "appropriate" action to address the Yen's decline as “Excessive, disorderly currency moves could have a negative impact on the economy and financial conditions” Mr. Suzuki said in a conference. An official from the ministry of finance did not state exactly what measures will the bank of Japan take but he said “ “the government” – instead of “government and the BOJ” – was ready to use all available tools to battle excessive yen declines. “Each of us has our own mandate. That’s why I carefully used ‘government’ as the subject at times and ‘government and BOJ’ at other times,” Kanda told reporters.
In conclusion, we would like to state that the market is waiting for the decisions of the government to know the fate of the currency as the Japanese monetary policy committee meeting is on September 21-22.
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