Yen-Dollar Exchange Rate Enters 150 Yen Era; Japan Expert Says "Decline in National Power Is the Root Cause"

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[Asia Economy Reporter Lee Ji-eun] The yen-dollar exchange rate has surpassed the 150-yen mark, with the yen hitting its lowest value in 32 years. Amid this unprecedented yen depreciation, concerns are rising within Japan that the country's economy, weakened by prolonged deflation, will suffer significant damage across various sectors.

According to Bloomberg on the 20th (local time), the yen was trading at 150.19 yen per dollar in the Tokyo foreign exchange market. After the yen briefly crossed the 150-yen threshold at 150.08 yen per dollar the previous day, the yen-dollar exchange rate has remained around 150 yen. This is the first time since August 1990 that the yen's value has fallen below the 150-yen level against the dollar.

◆ Yen depreciation hits Japan's economy broadly... concerns over a vicious cycle = Nihon Keizai Shimbun forecasts that the unprecedented yen weakness will widen Japan's trade deficit, further fueling the yen depreciation phenomenon. This is because the structure where yen weakness boosts price competitiveness and benefits export companies no longer applies as Japanese firms have relocated production bases overseas.

For example, Honda has moved many of its production bases overseas since the 2010s and procures raw materials in dollars from regions such as South America.

According to analysis by Yamato Securities in Japan, in the 2000s, a 1-yen depreciation against the dollar increased corporate operating profits by 0.7%, but currently, this effect has diminished to only 0.4%.

Moreover, amid the sharp rise in raw material and energy prices caused by the Russia-Ukraine war, the yen's depreciation is putting pressure on expanding the trade deficit. In fact, Japan's Ministry of Finance announced on the 20th that the trade balance for the first half of this year recorded a deficit of 11.0075 trillion yen, the largest ever since 1979. Among this, the surge in energy prices combined with yen depreciation caused import value (60.5837 trillion yen) to increase by a staggering 44.5% year-on-year. The increase in export value was only 19.6%.

If the trade deficit continues to widen like this, the selling pressure on the yen will accelerate further, leading to a 'vicious cycle of yen depreciation' caused by the falling yen value.

The decline in yen value is also expected to negatively affect food imports and labor force procurement. Nihon Keizai Shimbun analyzed, "Japan's food self-sufficiency rate is only 40%, and its energy import dependency reaches 90%," adding, "The cost of food imports due to yen depreciation has led to an outflow of income abroad."

Additionally, the rising exchange rate is expected to reduce the number of workers coming from overseas countries such as Vietnam, causing difficulties in labor supply. According to statistics from the Japan International Cooperation Agency (JICA), to achieve the economic growth targets set by the Japanese government, about 5 million more workers than currently available will be needed by 2040. However, the yen's depreciation is reducing the incentives for foreign workers to migrate to Japan.

◆ Ultra-low interest rate monetary policy identified as a cause of Japan's economic vulnerability = Recently, while the global decline in currency values amid a strong dollar trend has been a concern, Japan's economy is particularly struggling due to the government's flawed monetary policy. The ultra-low interest rate policy made it easy for companies to secure funds but failed to build solid foundations. The Bank of Japan introduced negative interest rates in 2016 to resolve deflation and encourage consumption.

Nihon Keizai Shimbun stated, "The prolonged low interest rate environment allowed companies without self-sustaining capabilities to survive, causing a negative effect where manpower and capital did not flow to competitive companies," adding, "As Japan's economic metabolism weakened, the overall corporate competitiveness deteriorated, creating a trap."

There is also a view that Japan's weakening national power contributed to the yen's depreciation. The decline in the authority of Japanese companies and technology has led to lowered expectations for the Japanese market.

Watanabe, director of the Japan International Monetary Institute, told Asahi Shimbun, "The energy crisis and food issues triggered by the Ukraine conflict have surfaced, leading the market to recognize vulnerabilities in Japan's national power and economic prospects," adding, "This market analysis is reflected in the yen's depreciation."

He suggested that instead of temporarily intervening to buy yen, the Japanese government should implement long-term policies to strengthen national power. Watanabe emphasized, "Even though the government holds foreign exchange reserves amounting to 180 trillion yen, defending the yen's value is difficult. Companies should raise wages and pay bonuses rather than hoarding profits, and the government should implement redistribution policies using taxes."

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