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Impact of the Depreciation of the Japanese Yen Since 2022

GOOVER DAILY REPORT July 4, 2024
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TABLE OF CONTENTS

  1. Summary
  2. Causes of the Yen Depreciation
  3. Impacts on Japan's Economy
  4. Socio-Economic Implications
  5. Interventions by the Bank of Japan
  6. Comparative Analysis: Past Currency Depreciations
  7. Conclusion

1. Summary

  • This report delivers a comprehensive analysis of the depreciation of the Japanese yen since 2022, focusing on the underlying causes such as Japan’s low-interest-rate policy versus higher rates in other economies like the United States. It discusses the significant outcomes of this depreciation, including increased import costs, heightened inflation, and the resulting strain on businesses and wages. Additionally, it addresses the socio-economic impacts, such as depressed wages and reduced attractiveness for foreign talent, as well as the Bank of Japan's (BOJ) limited success in stabilizing the currency through interventions. The report offers a comparative analysis with past currency depreciation events and global economic trends to provide a broader context.

2. Causes of the Yen Depreciation

  • 2-1. Interest Rate Differential

  • The Japanese yen has depreciated significantly against the US dollar due to the wide interest rate gap between Japan and the United States. The Federal Reserve has kept interest rates elevated in response to strong US economic data, while the Bank of Japan (BOJ) has maintained a policy rate close to zero percent. This discrepancy in interest rates has made the dollar more attractive to investors, leading to a decline in the yen's value.

  • 2-2. Global Economic Pressures

  • Another key factor contributing to the yen's depreciation is the overall strength of the US dollar, which has exerted pressure on many Asian currencies, including the yen. The rapid depreciation was exacerbated by high US inflation data, which has led to market speculation that the Federal Reserve will continue to keep rates high. Additionally, Japan's economic reliance on imports for energy, food, and raw materials means that a weaker yen increases import costs and inflation. Despite BOJ's interventions, such as spending approximately 9.79 trillion yen between April 26 and May 29 to stabilize the currency, these efforts have had limited success.

3. Impacts on Japan's Economy

  • 3-1. Increased Import Costs

  • The depreciation of the Japanese yen since 2022 has significantly increased import costs for Japan. As the yen weakens, the cost of goods and services imported from abroad rises. This has put a strain on businesses that rely on foreign products, leading to higher overall production costs. Consequently, this has exacerbated inflation within the country, particularly impacting essential goods and energy prices.

  • 3-2. Inflation Rise

  • One of the most direct effects of the yen's depreciation has been a notable rise in inflation. Fueled by increased import costs, inflation has surged across various sectors of the economy. Consumers face higher prices for everyday goods and services, which reduces their purchasing power and affects overall economic stability. The heightened inflation has been challenging for policymakers, as traditional measures to curb inflation, such as interest rate hikes, have been limited in Japan's low-interest-rate environment.

  • 3-3. Business Challenges

  • The weak yen has presented a range of challenges for Japanese businesses. According to a news report from 'Asia to Japan,' businesses are suffering not just from increased costs but also from difficulties in attracting foreign talent. With the yen hovering around 157 against the dollar, wages in dollar terms have decreased, making Japan less attractive to potential talent from nearby countries like China, Taiwan, and South Korea. These challenges exacerbate existing labor shortages and limit the competitiveness of Japanese companies on the global stage.

4. Socio-Economic Implications

  • 4-1. Depressed Wages

  • The rapid depreciation of the Japanese yen, with the exchange rate hovering around 157 yen per dollar, has led to a significant reduction in wages when converted to dollar terms. According to the report '$20,000 annual pay: Japan's weak yen drives away Asian talent' by Asia to Japan, this reduction is making it challenging for workers to sustain themselves in major cities like Tokyo. For instance, an annual income of 3 million yen, which translates to approximately $19,100, is now seen as insufficient by potential employees from neighboring countries.

  • 4-2. Foreign Talent Migration

  • The weak yen's effect on wages has also impacted Japan's ability to attract foreign talent. The article '$20,000 annual pay: Japan's weak yen drives away Asian talent' highlights that recruitment companies, such as Asia to Japan, are seeing decreased interest from students in countries like China, Taiwan, and South Korea. This reduction in interest is attributed to the challenging economic conditions created by the yen's depreciation, which has made Japan a less attractive destination for career opportunities.

5. Interventions by the Bank of Japan

  • 5-1. Currency Market Interventions

  • The Bank of Japan (BOJ) has been actively involved in currency market interventions to address the rapid depreciation of the yen. The interventions have been largely influenced by the substantial interest rate gap between Japan and the United States, where Japanese rates remain near zero while the U.S. Federal Reserve maintains higher rates. This gap has increased the demand for the dollar, leading to a significant weakening of the yen. On multiple occasions, Japanese authorities, including the vice finance minister for international affairs, have expressed a heightened sense of urgency in monitoring market developments and readiness to respond to rapid fluctuations. For instance, in a bid to slow the rapid fall of the yen against the dollar, the Japanese Finance Ministry announced it had spent around 9.79 trillion yen ($61 billion) between April 26 and May 29.

  • 5-2. Impacts and Effectiveness

  • Despite these interventions, the depreciation of the yen has continued, hitting its weakest level since 1986. The yen fell as much as 0.4% to ¥160.39 per dollar, prompting concerns over its impact on Japan's economy. The weakened yen has increased import costs, hurting Japanese consumers and raising inflation levels, which in turn has caused growing unease among businesses. The persistent pressure on the yen, despite the BOJ's efforts, highlights the challenges posed by the wide interest rate differential with the United States. Experts have noted that the repeated interventions have not fully contained the yen's slide, demonstrating limited effectiveness under the current global economic conditions.

6. Comparative Analysis: Past Currency Depreciations

  • 6-1. Historical Context

  • The depreciation trend of major currencies relative to the yen has historical precedents. Following the global economic crisis of 2008, the yen appreciated significantly against other major currencies, except for the Swiss franc. This pattern shifted notably on April 4, 2013, when the Bank of Japan (BOJ) announced an expansive asset purchase program to bring Japan from deflation to inflation, targeting a 2% inflation rate. Although it aimed to double the money supply, this move raised concerns about possible intentional devaluation of the yen to boost exports. However, Japan's commercial sector expressed worries that such devaluation would increase import prices, particularly energy and raw materials.

  • 6-2. Global Economic Trends

  • The considerable depreciation of the Japanese yen since 2022 aligns with several global economic trends. For one, the yen's value against the US dollar reached a new 34-year low in 2024, hitting the psychological 155-level per dollar for the first time since June 1990. This decline reflected a broader trend affecting many Asian currencies, exacerbated by US inflation data suggesting sustained strength of the US dollar. The yen's depreciation increases import costs for essential items like energy, food, and raw materials, which intensifies imported inflation and compels Japanese enterprises to reduce production capacity. Other Asian currencies, such as the South Korean won and the Thai baht, have similarly suffered depreciation pressures, limiting monetary policy maneuverability for central banks in the region. These pressures pose significant challenges for economic recovery in Asia, amid projected growth accelerations from the 2023 COVID-19 rebound.

7. Conclusion

  • The depreciation of the Japanese yen since 2022, driven primarily by Japan's low-interest-rate policy in contrast with higher rates in major economies like the United States, has led to several significant economic and socio-economic challenges. The increased import costs have exacerbated inflation, straining businesses and raising the cost of essential goods. Despite the Bank of Japan's (BOJ) interventions, including the expenditure of approximately 9.79 trillion yen, efforts to stabilize the yen have been largely ineffective due to persistent global economic pressures, particularly the strong US dollar. Consequently, wages have been depressed in dollar terms, diminishing Japan's appeal to foreign talents and complicating labor shortages. The findings underscore the complexity of managing currency values in an interconnected global economy and highlight the necessity for multi-faceted, adaptive economic policies. Future prospects indicate that unless new strategic approaches are adopted, the yen might continue to face pressure, inviting further socio-economic challenges. Policymakers and businesses must consider innovative solutions to mitigate these issues and bolster Japan's economic resilience.

8. Glossary

  • 8-1. Japanese yen [Currency]

  • The official currency of Japan, which has significantly depreciated since 2022 due to various factors including Japan's low-interest-rate policy. The depreciation has had extensive economic and socio-economic impacts.

  • 8-2. Bank of Japan (BOJ) [Institution]

  • Japan's central bank, responsible for monetary policy. The BOJ has attempted several interventions to stabilize the yen, including spending JPY 9 trillion in late 2022 and April-May 2024, though with limited success.

  • 8-3. Interest Rate Differential [Economic Term]

  • Refers to the difference in interest rates between countries, which has a significant impact on currency values. The wide gap between Japan's near-zero interest rates and higher rates in the US has contributed to the yen's depreciation.

  • 8-4. $20,000 annual pay [Economic Indicator]

  • Reflects the annual salary in yen, which has become less attractive in dollar terms due to the yen's depreciation, leading to challenges in attracting foreign talent to Japan.

9. Source Documents