The value of Japan’s currency has tumbled so much, that its value is back to where it was in 1990, shortly after Japan’s famous “bubble economy” burst. For a moment on Monday it was trading at 160 yen to US$1. A few years ago, it was closer to 100 yen to US$1.
The yen’s accelerating slide could ultimately be bad news for people in Japan. A weaker yen squeezes households by increasing import costs. Japan is heavily reliant on imports for both energy supplies and food, meaning inflation could rise.
A weaker yen is however a boon for Japanese exporters’ profits – and for tourists visiting Japan who find their currencies going further.
Why has the yen fallen so far?
The yen has been steadily sliding for more than three years, losing more than a third of its value since the start of 2021.
One factor behind its fall is momentum: the yen falls because investors are selling it – and investors continue to sell it because it is falling. In such instances, the market enters a self-fulfilling loop.
As a result of the falling currency, exporters are discouraged from converting foreign proceeds into yen, further decreasing demand.
However there are also major policy reasons for the currency’s sharp decline.
For years, the Bank of Japan (BOJ) has kept interest rates extraordinarily low to encourage more inflation in its economy, as well as to boost bank lending and spur demand.
In February, in the face of widespread labour shortages and a weakening yen, Japan was overtaken by Germany as the world’s third-biggest economy and slipped into recession.
With low interest rates seen as a key factor in the rapid decline of the yen, last month the BOJ ended its policy of keeping its benchmark interest rate below zero, lifting its short-term policy rate from -0.1% to between zero and 0.1%.
After that decision, markets were then focused on the pace of further rate rises. On Friday, the BOJ announced it would hold interest rates steady, signalling that further increases weren’t imminent. This precipitated another round of selloffs in the yen, putting more pressure on the currency.
It was this wave of selloffs that drove the currency down to 160 yen to the dollar for the first time since 1990.
What effect is it having?
The decades-low value of the yen means tourist dollars are going further than they have for generations, leading to a boom in the industry. As well as the US dollar, the yen has also hit multi-year lows against the euro, the Australian dollar and the Chinese yuan – all strong tourism markets for Japan.
In February, Japan recorded 2.79 million visitors – a record for the month.
Domestic consumption, however, remains a major weak spot. Households tend to be net importers and are facing higher prices due to the weak yen.
The weakening yen is also a factor in the decision by big Japanese investors’ to keep their cash abroad, where it can earn better returns. This trend is exacerbated by an unusually strong US dollar which has meant that American investments and assets offer far better returns for major financial institutions.
What are Japanese authorities doing?
In recent years, Japanese authorities have intervened to prop up the value of the currency, because a weak yen complicates its objective of achieving sustainable inflation, and strengthening it could help increase domestic consumption and local investment.
Japan intervened in the currency market three times in 2022, selling US dollars it holds in reserve in order to buy yen. Tokyo is estimated to have spent around $60bn defending the currency at that time.
On Monday, after briefly hitting its multi-decade low, the yen rose sharply, leading traders to suspect that after weeks of threatening to intervene, Japan had stepped in to support its currency.
Japan’s top currency diplomat, Masato Kanda, declined to comment when asked if authorities in Tokyo had intervened.
“Today’s move, if it represents intervention by the authorities, is unlikely to be a one-and-done move,” said Nicholas Chia, Asia macro strategist at Standard Chartered Bank in Singapore.
“We can likely expect more follow through from [Japan’s Ministry of Finance] if the dollar/yen pair travels to 160 again. In a sense, the 160-level represents the pain threshold, or new line in the sand for the authorities.”
Reuters contributed to this report
