Amid global inflation, the Japanese yen has been weakening throughout the year. At the beginning of 2021, the yen was 104 to the US dollar. In March 2022, the yen was at 115 to the dollar and the depreciation continued until 130 against the dollar in April. On October 20, the yen depreciated below 150 to the dollar, reaching a new low of 32 years.
A widening gap between Japanese and US interest rates has been a major cause of the yen’s depreciation, because it makes it easier to sell yen in the market. In addition, the current weakening of the yen has been accelerated by rising fuel costs following the outbreak of the Russia-Ukraine war in February this year. However, it is difficult for the Bank of Japan to raise the interest rate as it would have a devastating influence on the Japanese economy.
Japan’s Finance Minister Suzuki Shunichi claimed that a weakening yen could have a negative impact on the economy, describing it as a “bad weak yen.” Likewise, Japan’s top foreign exchange diplomat, Kanda Masato of the Ministry of Finance, explained that “The drawback of a weak yen is that it increases the cost of importing energy and food, which increases household burdens.”
On July 12, 2022, Suzuki met with US Treasury Secretary Janet Yellen and agreed to address rising food and energy prices. In particular, Yellen voiced Washington’s view that Tokyo’s currency intervention could be justified only in “rare and exceptional circumstances.”
On September 22, the Kishida administration finally intervened in the foreign exchange market by buying the yen for the first time in 24 years. The Japanese government intervened in the market in 1998 after the Japanese economy suffered a slump as a result of the consumption tax being increased from 3 to 5 percent. As for the possibility of further intervention, Kishida fixed that Tokyo “will continue to take decisive action against excessive currency movements.”
The effect of the yen-buying intervention was temporary, and the Kishida administration, as well as the Bank of Japan, again intervened in the foreign exchange market on October 21. It was a “stealth intervention”, and Kanda said that “[w]We will not comment now whether or not we perform an intervention.”
For the period from September 29 to October 27, the Japanese government spent 6.34 trillion yen in yen-buying intervention to stem the currency’s slide against the US dollar. As for the continued yen-buying intervention, Suzuki commented, “We are doing this to maximize the effects to smooth out wild currency fluctuations.” The exchange rate intervention has been effective but only temporarily, due to the existence of the interest rate gap between Japan and the United States. On October 24, the Washington Post plot that it is “time to believe that Japan is accepting a weak yen”. Meanwhile, it was reported in the Japan Times on October 26 that Yellen had respected Tokyo’s decision on stealthy intervention in currency markets.
On November 15, the Japan Cabinet Office Announced that Japan’s gross domestic product (GDP) shrunken for the first time in four quarters in the period from July to September 2022, indicating an annualized drop of 1.2 percent, due to the influence of inflation and the weakness of the yen. On November 18, Nikkei Asia noted that Japan’s inflation reached a maximum of 40 years due to the increase in import costs as a result of the weakening of the yen. Upon learning of this news, the New York Times emphasized to the point that the Japanese economy contracted “unexpectedly” as a result of the depreciation of the yen.
At the same time, however, it should 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 “made-in-Japan products are easier to sell and relatively cheap compared to foreign products in all global markets, including the domestic market. This is good for the Japanese economy, where there is a continued lack of demand.”
Meanwhile, the weakening yen could also have a negative influence on Japan’s economic security. In an article published by the Asahi Shimbun on February 1, Kanda commented that the Finance Ministry would “intensify efforts on this front, such as increasing the staff that oversees economic security.”
Suzuki Kazuto, a professor at the University of Tokyo, warned that the weak yen will have an adverse impact on Japan’s economic security in the future. In an interview with the Weekly Economist published by the Mainichi Shimbun on May 23, Suzuki warned that Tokyo would have to pay attention to possible purchases of Japanese companies by foreign entities in the context of the weakening yen. He also noted that it is possible for foreign entities to buy Japanese land, although the possibility is low as it has been restricted by the Foreign Exchange and Trade Law revised in 2019.
The prolonged depreciation of the yen affected the lifestyle of the Japanese both inside and outside the country. Japanese diplomats have worried about the influence of the weak yen on their savings and living standards abroad. Like a Japanese diplomat said, “Prices here continue to rise. If the weak yen continues, I am concerned that it may affect my son’s education and other costs.” Another Japanese diplomat She complained“When wages drop in society at large, allowances for [Foreign Ministry] Employees are also reduced. It is difficult to increase the payments”. In other words, the weakening of the yen could have negative impacts not only on the Japanese economy but also on the quality of Japanese diplomacy in the end.
While prolonged inflation is a global trend, the Bank of Japan points of view “Current inflation is transitory and it maintains its expansive monetary policy.” Japan’s inflation rose to 3 percent in September, but it is still lower compared to 8 percent in the United States and 10 percent in the United Kingdom. On September 15, World Bank Group President David Malpass expressed his concerns: “Global growth is slowing sharply, and is likely to slow further as more countries slip into recession. My deep concern is that these trends will persist, with lasting consequences that will be devastating for people in emerging market and developing economies.” On October 11, Pierre-Olivier Gourinchas, economic advisor and director of research at the International Monetary Fund (IMF), plot that “policymakers need a steady hand as storm clouds gather over the global economy.”
Apparently, aPerfect storm” of global stagnation and recession is approaching the global economy, and Japan has been caught up in QE as well as the Japan-US interest rate gap. At the same time, you should be aware that it is likely that the global recession occurs in a transition period of geopolitical power. In the era of the rivalry between China and the United States in the Indo-Pacific, the potential for a kindleberger trap, as Joseph Nye Jr. argues, has profound implications for the global economy and world politics. Therefore, Japan should take effective measures against the depreciation of the yen and watch out for the global recession as well as the Kindleberger Trap, which are dangerously close.