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Japan’s Historic Yen Depreciation

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Japan’s Historic Yen Depreciation

Japan is concerned about the weak yen, but its policy options for responding are limited as a global recession looms.

Japan’s Historic Yen Depreciation
Credit: Depositphotos

In the middle of global inflation, the Japanese yen has been weakening throughout the year. At the beginning of 2021, the yen was 104 to the U.S. dollar. In March 2022, the yen was 115 to the dollar, and the depreciation continued down to 130 against the dollar in April. On October 20, the yen depreciated below 150 to the dollar, reaching a new 32-year low.

A widening gap between Japanese and U.S. interest rates has been a main cause of the depreciation of the yen, because it facilitates the sale of the yen in the market. Moreover, the current weakening of the yen has been accelerated by surging fuel costs after the Russia-Ukraine War broke out in February this year. Yet, it is difficult for the Bank of Japan to increase the interest rate, as it would have a devastating influence on the Japanese economy.

Japan’s Minister of Finance Suzuki Shunichi stated that a weakening of the yen could have a negative impact on the economy, describing it as a “bad weak yen.” Likewise, Japan’s top currency diplomat, Kanda Masato of the Ministry of Finance, explained that “The demerit of a weak yen is that it pushes up the import cost of energy and food, thereby increasing household burdens.”

On July 12, 2022, Suzuki had a meeting with U.S. Secretary of the Treasury Janet Yellen and agreed to tackle rising prices of food and energy. Notably, Yellen expressed Washington’s view that Tokyo’s currency intervention could be warranted only in “rare and exceptional circumstances.”

On September 22, the Kishida administration finally intervened in the foreign exchange market by purchasing yen for the first time in 24 years. The Japanese government intervened in the market in 1998 after the Japanese economy underwent depression as a result of the consumption tax hike from 3 percent to 5 percent. Regarding the possibility of further intervention, Kishida stated that Tokyo would “continue to take decisive steps against excessive currency moves.”

The effect of the yen-buying intervention was temporary, and the Kishida administration as well as the Bank of Japan intervened in the foreign exchange market again on October 21. It was a “stealth intervention,” and Kanda said that “[w]e won’t comment now on whether or not we conducted an intervention.”

For the period from September 29 to October 27, the Japanese government spent 6.34 trillion yen on the yen-purchasing intervention to stem the currency decline against the U.S. dollar. Regarding the continuous yen-buying intervention, Suzuki commented, “We are doing this to maximize effects to smooth sharp currency fluctuations.” The intervention in the foreign exchange rate has been effective but only temporarily, owing to the existence of the Japan-U.S. interest rate gap. On October 24, the Washington Post argued that it is “time to believe Japan is accepting a weak yen.” Meanwhile, it was reported in Japan Times on October 26 that Yellen had respected Tokyo’s decision on the stealth intervention in foreign exchange markets.

On November 15, the Cabinet Office of Japan announced that Japan’s gross domestic product (GDP) shrank for the first time in four quarters in the period from July to September of 2022, indicating annualized decline of 1.2 percent, due to the influence of inflation and the weak yen. On November 18, Nikkei Asia highlighted that Japan’s inflation hit a 40-year high owing to the increase of import costs as a result of the weakening yen. On hearing this news, the New York Times emphasized the point that the Japanese economy contracted “unexpectedly” as a result of the depreciation of the yen.

At the same time however, it has to be noted that the weak yen could have a positive impact on the economy in the long run. Honda Yuzo, a professor at Osaka Gakuin University, observed that “products made in Japan are easier to sell and relatively inexpensive compared to foreign products in all global markets, including the domestic market. This is good for the Japanese economy where there is an ongoing lack of demand.”

In the meanwhile, the weakening yen could have a negative influence on Japan’s economic security as well. In an article published by Asahi Shimbun on February 1, Kanda commented that the Ministry of Finance would “ramp up efforts on this front, such as increasing staff overseeing economic security.”

Suzuki Kazuto, a professor at Tokyo University, warned that the weak yen would have an adverse impact on Japan’s economic security in the future. In an interview with Weekly Economist published by Mainichi Shimbun on May 23, Suzuki warned that Tokyo would need to pay attention to possible purchases of Japanese companies by foreign entities in the context of the weakening yen. He also pointed out that it is possible for foreign entities to purchase Japanese land, although the possibility is low, as it has been restricted by the Foreign Exchange and Foreign Trade Act revised in 2019.

The yen’s prolonged depreciation affected the lifestyle of Japanese people both inside and outside of the country. Japanese diplomats have been concerned about the influence of the weak yen on their savings and living standards abroad. As one Japanese diplomat said, “The prices here just keep going up. If the weak yen continues, I’m worried it may affect my child’s education and other costs.” Another Japanese diplomat complained, “When salaries in general society drop, allowances for [Foreign Ministry] employees are also lowered. It’s hard to raise the payments.” In other words, the weakening yen could have negative impacts not only on the Japanese economy but also on the quality of Japanese diplomacy in the end.

While the prolonged inflation is a global tendency, the Bank of Japan views “the current inflation as temporary and maintains its expansionary monetary policy.” Japan’s inflation rose to 3 percent in September, but it is still minor compared to 8 percent in the United States and 10 percent in the United Kingdom. On September 15, World Bank Group President David Malpass voiced his concerns: “Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies.” On October 11, Pierre-Olivier Gourinchas, the economic counsellor and the director of research of the International Monetary Fund (IMF), argued that “policymakers need steady hand as storm clouds gather over global economy.”

Apparently, a “perfect storm” of stagnation and global recession is approaching to the global economy, and Japan has been trapped in quantitative easing as well as the Japan-U.S. interest rate gap. At the same time, it needs to be aware that the global recession is likely to occur in a geopolitical power transition period. In the age of China-United States rivalry in the Indo-Pacific, the potential for a Kindleberger trap, as argued by Joseph Nye Jr., has profound implications for the global economy and world politics. Hence, Japan should take effective measures against the yen depreciation and watch out for the global recession as well as the Kindleberger trap, which are dangerously close.