Japan’s economy has not had a good year in 2024, to say the least. In February, the country fell into a brief recession and is now struggling with a crisis surrounding its national currency, the yen. The currency’s exchange rate has been on a continuous downward trend, most recently falling to 160.86 against the US dollar and 171.79 against the euro. This is the yen’s lowest value against the dollar since 1986 and the lowest value against the euro ever.
With these unprecedented lows, some have wondered how other countries would react to the ongoing problems of the Japanese economy – in particular, whether foreign markets would step in to stop the slide. How did the Japanese currency plunge and why do many industry experts blame the US?
Why is the yen losing value?
There are several factors, but it’s mainly a “product of the differing monetary policies between the Bank of Japan and its counterparts in developed markets — particularly the Federal Reserve,” according to Barron’s. This is the result of a large difference in interest rates between the U.S. and Japan; the Bank of Japan “has only just begun to ease its intense monetary stimulus, while the Fed and other central banks have been in a tightening cycle for years.”
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The Bank of Japan has tried to “normalize” monetary policy by “lifting its benchmark interest rate out of negative territory,” Barron’s said. But those efforts have been “dwarfed by the Fed’s rate hikes starting in 2022,” and that “wide gap is creating a popular so-called carry trade for Japanese investors and institutions, putting downward pressure on the yen.”
This interest rate gap “reflects the very different inflation ratios in the US and Japan,” Al Jazeera said. Japan has “struggled to keep prices and wages rising after decades of economic stagnation,” while the US “struggles to bring prices down amid robust economic growth.” This has made Japan one of the few countries that has “maintained the lowest borrowing costs to pull the economy out of a prolonged stagnation known as ‘the lost decades.'” But the trend is not entirely new; the currency “has been on a continuous downward trend since early 2021” and “over the past three years, the yen has lost more than a third of its value.”
How can the yen be saved?
The “cruel reality” is that the “downtrend will not end until the Federal Reserve deviates from its longer-term bullish policy path. And (Japanese officials) have no control over that,” Bloomberg said. Moreover, all “efforts by officials in Tokyo to support the yen have so far been ineffective.”
Japan has announced that it will take the necessary measures to stop the yen from falling. “Stable exchange rates are desirable. Rapid, unilateral changes are undesirable. In particular, we are deeply concerned about the impact on the economy,” Japanese Finance Minister Shunichi Suzuki said, according to Reuters. The government “is monitoring developments with great urgency, analyzing the factors behind the developments, and will take the necessary measures.”
But doubts remain over whether any measures can “reverse the yen’s weak wave, caused largely by uncertainty about how soon the U.S. Federal Reserve will start cutting interest rates,” according to Reuters. While the Bank of Japan has indicated it is likely to raise rates, an “increase from the current near-zero short-term policy rate target will still keep Japan’s borrowing costs very low,” meaning the yen would remain largely stagnant.
And small rate hikes “are unlikely to satisfy the market, and intervention is now pretty much the only way for Japan to slow the slowdown,” Tsuyoshi Ueno, economist at the NLI Research Institute, told The Japan Times. But it’s not all bad news. If inflation in the United States continues to fall, “the outlook for the dollar-yen interest rate gap could change very quickly, and the Japanese currency could make a dramatic comeback,” the paper said.
