[Insight & Opinion] Structural Factors Behind the Weak Yen Phenomenon and the Right Investment Strategy

Published 14 Jul.2023 15:50(KST)

The rapid decline in the value of the Japanese yen continues. Although it has risen slightly in the past few days, the yen exchange rate, which was around 1,000 won per 100 yen until April, is now at about 900 won per 100 yen. This is the first time in eight years since June 2015. Due to the influx of investment funds into the yen, the balance of yen deposits in commercial banks is also soaring. According to the Bank of Korea, yen deposits increased by $930 million in May alone, a 17.5% rise compared to the end of April. It is likely that this increased further in June.

The depreciation of the yen is largely due to the widening interest rate gap with the United States. Japan still maintains the interest rate on 10-year government bonds at zero. This means lending money to the country for 10 years yields no interest. There is no reason for the currency value of a country that pays no interest to rise. Although the governor of the Bank of Japan (BOJ) changed in April, the zero interest rate policy remains unchanged. While the rest of the world is raising interest rates to control inflation, Japan is moving in the opposite direction, so the yen’s value inevitably falls. The dollar-yen exchange rate, which was 127 yen per dollar earlier this year, is now in the 140 yen range.

The weak yen phenomenon is not entirely welcome in Japan either. It helps exports but raises import prices. Meanwhile, the consumer price inflation rate has remained above 3% for nine consecutive months since August last year. The Bank of Japan intervened directly to defend the yen by releasing dollars at the end of September last year, marking the first market intervention in 24 years. Although it might be time to reconsider exchange rates and interest rates, the current atmosphere is different from last year. For now, the BOJ has no intention of changing its monetary policy. It also views inflation as possibly temporary. Concerns among companies and individual foreign exchange demanders with large dollar needs are not significant. The stock market boom also reduces exchange rate anxiety. Unless the exchange rate rises sharply beyond the current level, the likelihood of government intervention does not seem very high. The turning point is expected to be the 150 yen per dollar level recorded in October last year. The 50-year moving average of the Japanese yen value is around 148 yen. Of course, if the U.S. Federal Reserve stops raising interest rates and the BOJ changes its monetary policy direction, the interest rate gap will narrow, and the record low yen phenomenon could end. However, considering that a rapid rate cut by the Fed is unlikely, the yen is more likely to remain at its current level for the time being.

Even if the yen’s value rises again, it may be difficult to return to previous levels. Based on the real effective exchange rate reflecting purchasing power, the yen has fallen 60% from its peak in 1995. This reflects Japan’s declining national power over time. At the root of the weak yen phenomenon are structural factors such as Japan’s worsening current account balance and declining national strength. It is unreasonable to view the current Japanese stock market boom as solely supported by economic fundamentals. From this perspective, investment in the yen can be considered relatively safe.

However, unexpected variables often occur in the international foreign exchange market, frequently rendering even reasonable predictions futile. When viewed as an investment asset, the expected returns compared to risks are not very high. Simply aiming for exchange rate gains is unlikely to yield significant profits unless the investment amount is very large. There is also the fact that transaction fees reduce profits from buying and selling currencies. Considering the yen as one of various investment tools or preparing sufficiently for a possible future trip to Japan might be a prudent approach.