Record Low Yen Causes Japan's Inflation to Soar to Highest in 31 Years... Is It Falling into a 'Vicious Cycle'?

September Consumer Price Index Up 3.0%
Corporate Price Index Hits Record High
Yen Weakness Fuels Trade Deficit
Japanese Expert: "Yen Depreciation Fundamentally Due to National Power Decline"

[Image source=EPA Yonhap News]

[Asia Economy Reporter Lee Ji-eun] Japan's consumer prices have reached their highest level in 31 years due to the depreciation of the yen and rising energy prices. The yen-dollar exchange rate has exceeded 150 yen for two consecutive days, dealing a blow to the Japanese economy. The lowest yen value in 32 years is pointed out to be fundamentally caused by the Bank of Japan's accommodative monetary policy along with the decline in Japan's national power.

According to the Ministry of Internal Affairs and Communications of Japan, the consumer price index (excluding fresh food) for September, announced on the 21st, rose 3.0% compared to the same month last year. Excluding the price increase caused by the consumption tax hike in April 2014, this is the highest increase in 31 years and 1 month since August 1991. Japan's consumer price inflation rate recorded over 2% for five consecutive months from April and exceeded 3% in September.

It is analyzed that the rise in energy and raw material prices due to the Russia-Ukraine war, combined with the depreciation of the yen, has fueled inflation. The corporate goods price index also rose 9.7% year-on-year, marking the highest level since statistics began in 1960.

The Asahi Shimbun stated, "Until now, the rise in crude oil and grain prices was the cause of consumer price inflation, but in recent months, the impact of the yen's depreciation has been significant," and forecasted, "Although the inflation rate in September recorded the highest level in 31 years, the record increase is likely to continue until the end of the year."

The situation of the yen-dollar exchange rate exceeding 150 yen for the first time in 32 years continued on this day as well. According to Bloomberg, the yen was trading at 150.19 yen per dollar in the Tokyo foreign exchange market. The yen-dollar value briefly reached 150.08 yen during the day, breaking the 150 yen mark for the first time since August 1990.

Nihon Keizai Shimbun predicted that the unprecedented yen weakness would expand Japan's trade deficit and further accelerate the yen depreciation phenomenon. This is because the structure where yen weakness enhances price competitiveness and benefits export companies no longer applies as Japanese companies move production bases overseas.

With the sharp rise in raw material and energy prices due to the Russia-Ukraine war, the depreciation of the yen is putting pressure on the expansion of the trade deficit. If the trade deficit widens like this, the selling pressure on the yen will accelerate further, leading to a 'vicious cycle of yen depreciation' caused by the decline in yen value.

The depreciation of the yen is also expected to have adverse effects on food imports and securing labor. Nihon Keizai Shimbun analyzed, "Japan's food self-sufficiency rate is only 40%, and its dependence on energy imports reaches 90%," adding, "The cost of food imports due to the depreciation of the yen has led to an outflow of income abroad." Furthermore, it is expected that the number of workers coming from overseas, such as Vietnam, will decrease due to the rising exchange rate, causing difficulties in labor supply.

Recently, while the strong dollar trend and the depreciation of currencies in many countries around the world have been problematic, the reason why the Japanese economy is particularly struggling is analyzed to be due to the government's flawed monetary policy. The ultra-low interest rate policy allowed companies to easily obtain funds but failed to build solid foundations.

There is also a view that the weakening of Japan's national power contributed to the depreciation of the yen. Watanabe, director of the Japan Institute of International Monetary Research, told the Asahi Shimbun, "As the energy crisis and food issues triggered by the Ukraine situation have surfaced, the market has recognized the vulnerability of Japan's national power and economic prospects," adding, "This market analysis is reflected in the depreciation of the yen."

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