'Lowest in 20 Years' Yen's Fall... "Cure for Deflation" vs "Vicious Cycle of Trade Deficit Impact"'

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The value of the Japanese yen, which hit its lowest point in 20 years, continues to plummet without showing signs of bottoming out. With expectations that the weak yen phenomenon could support Japan's ultra-low inflation, the Bank of Japan (BOJ) and the government are tolerating the weak yen. However, concerns are mounting that the downward pressure on trade, the foundation of the Japanese economy, could trigger further yen depreciation, leading to a vicious cycle.

◇ Surpassing 133 yen per dollar = According to Bloomberg News and others, the dollar-yen exchange rate exceeded 133 yen per dollar on the morning of the 8th. The dollar-yen rate, which recorded 132.98 yen intraday the previous day?the highest since March 2002?is continuing its upward trend in early trading.

Generally, a decline in currency value brings positive effects such as increased exports and improved corporate earnings, but it can also cause damage through rising import prices and expanding trade deficits. Currently, with energy prices soaring due to factors like Russia's invasion of Ukraine, Japan's imports are suffering greater damage, leading to an expanding trade deficit.

In fact, according to the preliminary balance of payments statistics released by Japan's Ministry of Finance on the same day, the current account surplus in April was 501.1 billion yen (approximately 4.7 trillion won), but the surplus size decreased by 56% compared to the same month last year. Japan's current account maintained a surplus for three consecutive months after recording the second-largest deficit ever in January due to the surge in energy prices. However, the rise in energy prices such as crude oil reduced the surplus compared to the same month last year. The trade balance, a core component of the current account, recorded a deficit of 688.4 billion yen. It shifted from a surplus of 282.2 billion yen in April last year to a deficit, and the deficit size greatly expanded from 166.1 billion yen in March.

For these reasons, the current view on the weak yen phenomenon is more filled with concern. In particular, there are criticisms that since Japanese companies have relocated production bases overseas, rising prices significantly increase costs, causing greater adverse effects.

◇ Weak yen could become a trigger for Japan's re-flation= However, there is also an assessment that the weak yen phenomenon leads to price increases in the Japanese economy, bringing positive effects. Bloomberg reported, "Price inflation caused by the yen could provide an opportunity for re-flation, which maintains stable prices over several years." Re-flation refers to an economic recovery state where the economy escapes deflation but does not reach severe inflation.

Masamichi Adachi, an economist at UBS Securities, evaluated, "The decline in the yen's value may be negative for households, but it is expected to have a more positive effect on the overall Japanese economy." He predicted that it could increase Japan's overseas earnings and revive the tourism industry, thereby revitalizing regional economies.

In fact, the BOJ and the Japanese government are tolerating the weak yen phenomenon to some extent, mindful that prematurely withdrawing monetary easing policies could shrink corporate activities and lead to economic deterioration. BOJ Governor Haruhiko Kuroda maintained his stance the day before, stating, "We will persistently continue strong monetary easing," while Japan's Finance Minister Shunichi Suzuki said, "Rapid fluctuations are undesirable," but only mentioned monitoring the situation, showing restraint in intervention.

Economist Adachi advised, "The profits from the weak yen phenomenon should be used well. Exporters need to make meaningful investments in production facilities and workforce, and structural reforms will also be necessary."

Meanwhile, Japan's first-quarter (January to March) gross domestic product (GDP) growth rate was revised upward to -0.5% annualized from the preliminary figure of -1.0% announced last month. The Ministry of Finance stated that although corporate capital investment and public investment decreased, personal consumption recovered.

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