Yen Depreciation: Historical Lows, Their Causes and Effects

Introduction:

The Japanese Yen has a floating exchange rate that has been depreciating sharply and continuously over the last 2 years (2022-2024), with it hitting its lowest exchange rate versus the US dollars (1 Yen to 0.0062 dollar) since decades on Jul 11,2024. This topic is concerning many investors as well as the Japanese government as it can bring devastating consequences if it is not monitored and fixed. This article will discover the causes, impacts and how the government is intervening in the price of Yen in greater detail.

Causes:

There are several reasons causing the depreciation of the Japanese Yen. One of these includes the domestic consumers in Japan tending to be net importers. This reduces the exchange rate of Yen since the consumers have to convert their Yen into other currencies to buy the imported good, which increases the supply of the Yen and reducing its price. Another reason is, many investors who tried to benefit from hot money flows have sold Yen due to its continuous depreciation, which further reduces its price, creating a loop that decreases its exchange rate.

However, the main reason behind the depreciation of the Yen is the low interest rate set by the Bank of Japan (BoJ). Since 2016, the BoJ has lowered interest rates to -0.1%, which essentially means the bank will give interest to borrowers, mainly aiming to stimulate economic activity to combat low economic growth. Such change, though, gave incentives for investors to make carry trades, which means they borrow from countries that has low interest rates (in this case Japan), then convert it to other currencies e.g. USD to invest in the country with higher returns. Since conversion of money is required, many Yen will be sold and the price of it reduces.

Effects:

With the Yen depreciating, the primary concern is that households in Japan is facing increasing living costs, since Japan mostly relies on imports for basic resources such as food and fuel. With a lower exchange rate, more Yen will be needed to buy the same amount of imported goods. In addition, as Japan generally has lower wage levels than economies of similar size, it further impacts domestic consumers’ ability to buy such import goods. As a result of this, ‘working holidays’ are becoming popular, where individuals decide to work in other higher income countries e.g. Australia and Canada. These workers then exchange their income back into the Yen as this tend to give them higher earnings with the comparatively high exchange rate of other countries. These activities may impact the Japnese macroeconomy as there will be less workers to contribute to economic growth of Japan.

Another effect of the low exchange rate is that the national debt of Japan is increasing, with the total debt of the Japanese in the end of 2023 being $8.6 trillion. If the Yen continues to depreciate, more Yen will be needed to exchanged to repay the same amount of the loans.

Increase in tourism to Japan is also an effect of the depreciation of Yen, although it is controversial whether this is positive or not. As Yen is relatively cheaper for other countries, many tourists are attracted to Japan which caused a boom in the industry. This contributed a little to the recovery of the recession and the value of Yen, but many locals are against tourism as it causes them disturbance.

How is the Yen recovering and what is the government doing:

Following the decade-low exchange rate on Jul 11, the Yen appreciated sharply, which can be due to a couple of reasons.

To combat the depreciation, the Finance Ministry of Japan and the Bank of Japan raised the interest rates. This essentially reduces carry trading, because the cost of borrowing will increase and the reward for carry trading is less. Additionally, Japan introduced margin calls, which means banks will asks investors to prove they can pay loans back by showing the amount of Yen owned by investors. This forces investors to buy Yen hence the Yen is appreciating.

It is also suggested that the Japanese government is intervening the market by buying its own currency with its US dollars reserve, although this is not officially announced. However, if this is true, analysts predict that more intervention to the market of Yen will occur in the future, as this is unlikely to be a one-time effort.

Conclusion:

Overall, although the depreciation of Yen is problematic for the Japanese, it is still more important to improve the macroeconomic performance. To do that, it is appropriate to maintain a balance between reducing the impact of the depreciation of the currency and promoting economic growth. With the Yen slightly recovering, it could be said that the impact of the banks’ and government’s action is considerable and it is possible that further adjustments will be made to improve the performance of Yen in the future.

Sources:

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