That’s why the Japanese yen has been weakening for years – and this is how it could develop in the future

• Japanese yen has been on a downward trend for years
• BoJmonetary policy is the main reason for yen weakness
• Reversal in BoJ interest rate policy could boost Yen

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The Japanese yen is the third largest reserve currency in the world, according to information from the International Monetary Fund (IMF). The respective national central banks only hold more US dollars and euros as currency stability reserves, but the yen is just ahead of the British pound and quite clearly ahead of the Chinese renminbi. The development of the yen is therefore of great importance not only for the Japanese economy, but also for international payment transactions – so it is worth taking a closer look at the performance of the Japanese currency.

The weak development of the yen

The relative weakness of the yen has been an important topic in discussions among foreign exchange experts for years. In the past three years, the yen has lost a total of 28.0 percent against the greenback at a current value of 0.007 (as of December 26, 2023) US dollar. In the last twelve months there was a decline of 6.6 percent. The yen even lost 10.1 percent against the euro over a twelve-month period. Those investors who come from the USA or the Eurozone and invested in Japanese stocks or funds had to accept a significantly weaker return – or even a negative return – due to the weak yen. That is why the weak yen has served as an argument not to invest in Japanese assets in recent months. Japanese companies such as Toyota, on the other hand, are benefiting from the high demand from abroad, which is accompanied by the weak yen. But how did the Japanese currency’s weak performance come about – and is a turnaround looming?

BoJ’s ultra-liquid monetary policy mainly responsible for Yen weakness

The main cause of the yen’s weakness is Japanese monetary policy. While central banks around the world – such as the US Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England and the Swiss National Bank (SNB) – have raised their key interest rates sharply since spring 2022 in order to combat inflation, The Bank of Japan (BoJ) stuck to its ultra-liquid monetary policy. The BoJ has been pursuing a zero interest rate policy since the 1990s – and thus much earlier than the Fed or the ECB later – in order to put a stop to the strong deflationary tendencies in the Japanese economy. In the past few months, despite rising price controls in Japan, the BoJ stuck to its stance and rejected any calls for interest rate increases. The result: the yen became less attractive compared to other currencies that could be used to earn interest. Demand for the Japanese currency decreased and the value of the yen decreased accordingly.

Is there a major change in the BoJ interest rate policy?

However, new developments on the financial markets could cause the yen to recover and gain value. The Japanese currency has recently shown a somewhat stronger performance – it has gained 2.5 percent in value against the US dollar in the past four weeks. The prospect of a rebound in the yen is tied to speculation that the BoJ will end its negative interest rate policy in the first half of 2024, Dow Jones Newswires reports. The increase in the reference value for the yield on 10-year government bonds to 1 percent, which was carried out in several stages, is interpreted as a step in this direction.

However, the BoJ continued to leave the short-term interest rate in negative territory, even though the Japanese inflation rate has been above the two percent target for a long time. At the last interest rate meeting, the Japanese central bank confirmed the negative short-term interest rate at minus 0.1 percent. BoJ boss Kazu Ueda emphasized that he did not want to be tied down to future interest rate increases. “When it comes to the question of whether we will take a step towards normalizing monetary policy, many Council members believe that we want to see more information about whether a virtuous cycle of wages and prices will become a reality,” Dow Jones quoted Newswires as saying the Japanese central bank chief.

The BoJ’s adherence to negative interest rates is viewed critically

An increasing number of analysts are critical of Japan’s adherence to negative interest rates. “The BoJ should not miss this unique opportunity,” Mari Iwashita, economist at Daiwa Securities, told Dow Jones Newswires. “If the BoJ doesn’t raise short-term interest rates in January, it could lose the chance to do so until the Fed completes the rate cuts.” According to Iwashita, a potential end to Japanese negative interest rates will not be followed by a series of interest rate hikes like those in the United States or the United States Eurozone be visible. The central bank is too cautious for that. “It seems that the hurdle for one Interest rate increase is very high after the end of negative interest rates,” says Iwashita.

How could the yen develop in the future?

However, the BOJ’s reluctance does not mean that the yen’s upswing is over, many strategists wrote after the BoJ meeting. Since the Fed and possibly other important central banks will implement key interest rate cuts in 2024, the US dollar or the euro would lose relative attractiveness compared to the low-interest yen – even if the BoJ does not abandon its cautious interest rate policy. Falling US yields would keep pressure on the US dollar against other currencies.

Kit Juckes, global macro strategist at Société Générale (SocGen), assesses the situation as follows: The recent price losses of the yen in response to the BoJ interest rate decision should not be over-interpreted. “The yen’s short-circuit reaction is not surprising, but probably does not represent a significant change in direction,” MarketWatch quoted Juckes as saying. The SocGen analyst expects the yen to continue to move steadily higher in the new year.

Editorial team finanzen.net

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