[Global Focus] As the US Takes Big Steps... The Endless Fall of the Yen: Will It Reach '1 Dollar = 150 Yen'?

Investment Outflow Due to Widening US-Japan Interest Rate Gap... Summer 2024 Expected to Break 2002 Low

[Asia Economy Reporter Park Byung-hee] As the U.S. central bank, the Federal Reserve (Fed), initiated a big step (a 0.5 percentage point increase in the benchmark interest rate) for the first time in 22 years, Japan's anxiety is growing over the possibility that the yen, which has already fallen to its lowest level in 20 years, could decline further. This is because, as the policy interest rate gap between the U.S. and Japan widens, investment funds are expected to flow out to the U.S., where higher interest income can be earned. Although there are calls for the Bank of Japan (BOJ), Japan's central bank, to raise its benchmark interest rate or for the Japanese Ministry of Finance to intervene in the foreign exchange market to stop the yen's decline, all are considered unlikely, leading to an analysis that the yen's downward trend is inevitable.

The yen's value has fallen to 130 yen per dollar, already reaching its lowest level since 2002. Market participants are focusing on whether the 135 yen per dollar level, the yen's low point in 2002, will break. There are pessimistic forecasts that the 135 yen per dollar level could collapse this summer, followed by a rise to 140 yen and even 150 yen per dollar.

◆ Despite criticism of the ‘bad weak yen’... Why BOJ remains unmoved = At the monetary policy meeting on the 28th of last month, the BOJ decided to maintain the short-term policy interest rate at -0.1% and continue its large-scale monetary easing policy aimed at guiding the 10-year government bond yield, a long-term interest rate, to 0%. This was interpreted as a declaration of intent not to raise interest rates even if it means tolerating a weak yen, causing the dollar-yen exchange rate to quickly fall to the 130 yen range.

If the BOJ does not change its stance while the Fed's big step has already begun, the interest rate gap between the U.S. and Japan will widen further, inevitably accelerating the weak yen. Unlike the Fed, the reason the BOJ does not raise its benchmark interest rate is that Japan's inflation remains very low after experiencing a long period of deflation known as the ‘lost 30 years.’

In March, the U.S. consumer price index (CPI) inflation rate rose to 8.5%, the highest since 1981, whereas Japan's March CPI inflation rate was only 1.2%. The core CPI inflation rate excluding fresh food, which the BOJ uses as a benchmark for monetary policy, was only 0.8%. Although there are expectations that the April CPI, which recorded 2.1%, could reach the BOJ's monetary policy target of 2%, the prevailing view is that this will be a temporary rise.

Moreover, the core CPI inflation rate is expected to remain only 0.8% in April as well. Japan's core CPI inflation rate has not exceeded 2% since 2015. Even in 2015, the rise was only a temporary increase due to the consumption tax rate hike from 5% to 8%.

The BOJ is also conducting open market operations by purchasing government bonds to prevent market interest rates from rising. Since 2016, the BOJ has adopted a policy of unlimited purchases of government bonds when yields reach a certain level to suppress interest rate increases, aiming to stimulate the economy by making it easier for households and companies to borrow money. Currently, the BOJ purchases government bonds when the 10-year bond yield reaches 0.25%. With the U.S. 10-year government bond yield more than doubling this year and surpassing 3.1%, the BOJ's policy is another cause of yen weakness. Investment funds are flowing out to the U.S., where higher interest income can be earned, fueling the yen's decline.

On the other hand, there is an analysis that the reason the BOJ keeps interest rates low is to prevent the burden of debt costs on the Japanese government from increasing. Japan's government debt-to-GDP ratio is the highest among developed countries. The ratio rose from 229.6% in 2013, when Abenomics was in full swing, to 263.1% in 2021. An increase in Japanese government bond yields means higher interest costs that the Japanese government must bear.

◆ China-Taiwan relations also a variable = According to an analysis by Mitsui Sumitomo Bank, when the interest rate gap between the U.S. and Japan widens by 1 percentage point since 2000, the yen's value falls by about 8 yen per dollar. If the current U.S. benchmark interest rate, which is between 0.75% and 1%, rises to 3% by the end of the year, the yen could fall by an additional 16 yen per dollar.

Tatsuhiro Iwashige, an analyst at Japan's Five Star Asset Management, said, "The interest rate gap between the U.S. and Japan will continue to widen, and the influence of the opposing directions of U.S. and Japanese monetary policies is very significant," adding, "The dollar-yen exchange rate could reach 150 yen per dollar by March next year."

In addition to monetary policy, Japan's current account deficit and the escalating tensions between China and Taiwan are also cited as factors fueling yen weakness.

Nihon Keizai reported last month that Japan's fiscal deficit this year could record a deficit for the first time since the second oil shock in 1980 due to the weak yen and rising oil prices.

Daisuke Uno, an investment strategist at Mitsui Sumitomo Bank, diagnosed that the rising tensions between China and Taiwan are also a source of concern externally. The geopolitical crisis in East Asia could increase the selling pressure on the yen. Uno said, "If tensions between China and Taiwan rise ahead of Taiwan's 2024 presidential election, the yen's value could fall to 140-150 yen per dollar."

◆ Will Japan join the reverse currency war? = Currency weakness is not only Japan's concern. The British daily Financial Times (FT) assessed on the 7th (local time) that the strong dollar is increasing the risk of a ‘reverse currency war.’

Typically, currency wars focus on suppressing the rise of a country's currency value to enhance export competitiveness. However, the recent movements are the opposite, hence the term reverse currency war.

Currently, the dollar is strong not only against the Japanese yen but also against the euro, British pound, Chinese yuan, and emerging market currencies worldwide. Globally, inflationary pressures due to the strong dollar are increasing. FT warned that countries might compete in policies to induce their currencies to strengthen to reduce inflationary pressures.

However, the possibility of the Japanese government hastily intervening in the foreign exchange market seems low. Masaki Kano, chief economist at Japan's Sony Financial Group, pointed out that foreign exchange market intervention could backfire. Since the Fed has announced successive big steps through the end of this year, even if the Ministry of Finance buys yen, the expected yen appreciation effect is unlikely to materialize. Kano said, "If intervention fails, the Ministry of Finance will have no alternatives," adding, "It is better to keep foreign exchange market intervention as a last resort."

Japan's TBS broadcast reported on the 22nd of last month, during the International Monetary Fund (IMF) and World Bank (WB) annual meetings, that Japanese Finance Minister Shunichi Suzuki and U.S. Treasury Secretary Janet Yellen discussed joint intervention in the foreign exchange market. Before visiting Washington for the IMF and WB annual meetings, Finance Minister Suzuki also said at the G20 Finance Ministers and Central Bank Governors meeting that he would closely communicate with the U.S. and other currency authorities about appropriate responses to exchange rate movements. However, a senior official from the Japanese Ministry of Finance later moved to clarify that the TBS report was inaccurate.

This content was produced with the assistance of AI translation services.