12/15/2023 0 Comments Japanese exchange rate![]() This is eroding the purchasing power of consumers, leading to a decline in real consumption.Įven with the yen’s depreciation, Japan’s trade deficit continues and export quantities have not increased. The current inflation rate is in the 3% range, with food prices accounting for 70% of this inflation. The BoJ revised the inflation rate for the 2023 fiscal year from 1.8% to 2.5%. The sharp depreciation of the yen is causing import prices to soar, keeping Japan’s inflation well above the 2% target. To ensure inflation decreases toward the 2% target, there is a possibility of a further rate hike or maintaining current high interest rates (5.25 to 5.5%). Inflation stands at 3.7%, but excluding energy and food is still above 4%. The US economy is stronger than expected, with a tight labor market. US monetary policy has greatly influenced the interest rate differential. By leaving the reference rate at 0.5%, the exchange rate market judged there was little intention for the central bank to raise interest rates significantly, leading to foreign exchange transactions where people felt reassured to sell yen and buy high-interest dollars. The depreciation of the yen progressed even after the policy adjustment. It was unclear whether the central bank wanted to maintain a low-interest policy to increase domestic demand to achieve the 2% inflation target or raise interest rates to alleviate excessive depreciation of the yen. Investors found this policy difficult to understand. Bank of Japan Governor Kazuo Ueda faces a QE dilemma. This meant that fluctuations of up to 1% can be tolerated, but the BoJ will try not to let the long-term interest rates deviate significantly from 0.5%. But unlike in 2022, they left 0.5% as a reference. Under the new leadership of Governor Kazuo Ueda, the BoJ further raised the fluctuation range of long-term interest rates to 1% in July. US trade tensions ease, Chinese economy stabilizing ahead of Xi trip Market participants widely believe that the BoJ raised the fluctuation range of the 10-year interest rate from plus or minus 0.25% to plus or minus 0.5% in December 2022. The widening of the interest rate differential has led to a sharp depreciation of the yen. ![]() ![]() While the United States and Europe are shifting to interest rate hikes to curb inflation, the BoJ has maintained yield curve control. For the 10-year interest rate, a small fluctuation range has been permitted. This sets short-term interest rates at negative 0.1% and aims for 0% for 10-year long-term interest rates. This is partly attributable to the BoJ’s monetary easing policy, namely yield curve control, that was adopted in 2016. Against the US dollar, the yen depreciated by around 30%. Since early 2022, the yen has declined by an average of about 20% against major currencies. The extreme depreciation of the yen resumed from May 2023. But the yen is still considered undervalued compared to Japan’s economic fundamentals, which are around 100 to 110 yen. The response from the Bank of Japan (BoJ) also contributed to the appreciation, leading to the yen reaching 130 against the US dollar by early 2023. Partly due to a decline in long-term interest rates in the United States from November 2022, the exchange rate returned to below 140 yen. When it exceeded 145 yen against the US dollar by September 2022, and then 150 yen in October, the Ministry of Finance conducted two rounds of foreign exchange interventions. Japan’s exchange rate environment made a big turnaround in 2022 when the yen began to depreciate sharply.
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