Yen ‘shocks’ markets, returns to 1986

The Japanese currency market and economy are being shaken by the yen’s fall to its lowest level in 38 years against the dollar, forcing the country’s finance ministry and the Bank of Japan to review their strategy.

The Japanese currency has lost more than a third of its value since 2021 due to the wide gap between interest rates In the United States and Japan, where borrowing costs in the Land of the Rising Sun, unlike in the United States and Europe, have remained at historically low levels to boost prices and wages after decades of economic stagnation.

Given that the dollar/yen exchange rate broke the 160 yen barrier, the point at which the Japanese authorities rushed to provide support for the currency about two months ago, it is very likely that we will see further intervention from the Bank of Japan. . Japanese Finance Minister Shunichi Suzuki said yesterday that the country’s authorities will take the necessary steps to avoid harming the economy.

As happens in any normal economy, the significant devaluation of the currency gave a significant boost to exports, but at the same time led to a significant rise in import prices. Since Japan displays trade deficit For many years, by importing most of the goods you need, the problem has been growing, which is especially felt in the cost of energy.

Households are struggling to make ends meet as fuel and food prices continue to rise. In April, prices of 2,806 food items rose, and in May, 417 items. In fact, Japanese media are pointlessly reporting that octopus is now more expensive than the famous wagyu beef.

The last time the Bank of Japan supported the yen was in April, when it bought a record 9.788 trillion yen ($62.2 billion). One reason the yen may have fallen is the perception that the Bank of Japan intends to…withdraw from the market. Bonds. But at the same time, other developments show that investors have not lost confidence in Japan – at least not yet.

The yen’s weakness did not start this year, and it did not start three years ago. Since January 2012, when the notorious Abe policies, policies pursued by the government and the Bank of Japan under Prime Minister Shinzo Abe, began, the yen has fallen by more than 53% against the dollar.

According to Capital Economics, the yen’s decline in recent months cannot be explained by normal market trends. For example, short positions, while noticeable, do not appear to have increased significantly during this period. There are no signs of significant capital outflows from Japanese investors.

Primarily, analysts believe that the yen’s “attack” also increases market pressure on the Bank of Japan to raise interest rates at its July meeting. The Bank of Japan effectively ended yield curve control last March by raising its key interest rate to 0%, but markets appear to expect more, pushing the yen to its lowest level since 1986.