Japan seems to have bought some time and a respite for a yen that on April 26 fell to its lowest level since 1990, trading at 160 units per dollar. But analysts assure that the problems that sustain the depreciation are still there and that no intervention by the Japanese authorities is going to put an end to the downward path in the short term. The currency closed last week slightly above 153 yen per dollar, the best weekly record (+3.5%) since the end of 2022, after the authorities injected the equivalent of almost $60 billion into the market.
Neither the Ministry of Finance, which has the final say, nor the Bank of Japan (BoJ), which executes the measure, have confirmed the intervention, but the strong swings in the price in the last week leave no room for doubt. Analysis of the central bank’s balance sheet carried out by Bloomberg points to two interventions of about 35,000 and 24,000 million dollars, respectively, an impressive but manageable figure given the foreign exchange reserves of 1.2 trillion dollars that Japan accumulates. According to Udith Sikand, an analyst at Gavekal Research in Hong Kong, the intervention has been carried out in coordination with the United States and South Korea. “Under these conditions, the risk that a free fall of the yen ends up precipitating a succession of devaluations among Asian currencies is quite contained,” he stressed this week.
After touching 160 units per dollar, Alvin Tan, of RBC Capital Markets, places the new red line at 165 yen per greenback, a level unknown since 1986, shortly after the Plaza exchange agreements.
For the first time in 17 years, the Japanese monetary authority agreed last March to raise interest rates to a band between 0% and 0.1%. This is a limited movement by Western standards, but immense for the trajectory of the Japanese economy. After decades of deflation, frozen salaries, resistance to corporate changes, labor excesses and consumer reluctance, the measure marked the end of negative interest rates and took a step towards monetary normalization.
However, the shift in monetary policy has not managed to contain the depreciation of the yen, which has dropped more than 10% of its value against the dollar since the beginning of the year. The currency is a victim of the differential between the interest rates of the BoJ and those of the Federal Reserve (5.25%-5.50%) and now that the rate cut in the United States seems to be delayed, these pressures are not going to abate. remit in the short term.
There are also market reasons that explain the depreciation of the yen. On the one hand, short positions by foreign investors have reached record levels, much to the irritation of Japanese authorities. On the other hand, Japanese institutional investors—such as the Government Pension Fund with its portfolio valued at around $1.4 trillion—have 50% of their assets abroad and reinvest the substantial profits obtained abroad. “Finally, recent changes in the taxation of savings accounts have encouraged carry trade —who borrow in yen to invest in Mexican pesos, for example— among retail investors,” says Sikand.
The evolution of prices (2.8% in February) and the salary increases agreed upon in the agreement (3.7% this year and 2.3% the previous year, which was already a historic increase) support the decision of the governor of the Bank of Japan, Kazuo Ueda, to raise rates in March, as explained by Seisaku Kameda, economist at the Sompo Institute Plus, in a note published by the World Economic Forum (WEF). “Although it has a very symbolic meaning, its direct impact on financial markets or the economy is still relatively small,” says Kameda.
Normally, a weak currency serves as a stimulus for exports, which in the case of Japan represent a not inconsiderable 21.6% of GDP. Adding to the traditional strength of its automotive sector is now Japan’s repositioning in the global supply chain. With the open trade war between the United States and China, several American companies—Microsoft, Oracle, Micron and Blacstone—have transferred part of their investment in China to Japan. TSMC, the Taiwanese firm that leads the world’s semiconductor production, opened its first plant in Japan this year and has announced plans to open a second. A cheap yen has boosted foreign tourist arrivals to the country to record numbers last March. However, for consumers, the weakness of the currency makes the shopping basket much more expensive, since Japan imports most of the energy and food it consumes.
The devaluation of the yen explains, to a large extent, why Japan entered a technical recession at the end of 2023, which led it to give up its position as the third world economy to Germany. The data from recent months point to a good performance of industrial production in March (3.8%), which together with the recovery of exports and tourism can return the GDP to the growth zone, according to analysts.
But it takes time to obtain structural results from all these political changes. “The era of ultra-low rates reflects the fact that the Japanese economy has suffered from secular stagnation and mild but persistent deflation over the past 20 years,” notes Seisaku Kameda. “Although we are seeing dramatic changes in Japan, progress is basically occurring in nominal terms. Rapid population aging will continue and innovations, such as investment in new technologies and their widespread use, lag behind other developed economies. Japan’s problems in real terms have not disappeared,” says this former BoJ chief economist.
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