How long will the Japanese yen fall after reaching a 34 year low

The trading price of the Japanese yen against the US dollar fell to 154.85 yen per dollar on the 22nd, breaking a 34 year record and continuing to approach the "dangerous" level seen by industry insiders as 155. Japanese Finance Minister Toshiichi Suzuki stated on the 23rd that "no options will be ruled out" in response. According to Japanese media interpretation, he is hinting that the government will intervene in the foreign exchange market at all costs to prevent further depreciation of the yen.

Analysts believe that the depreciation of the yen is highly correlated with the Federal Reserve's aggressive interest rate hikes, leading to a shrinking wallet and sluggish consumption among Japanese people; Although the future appreciation of the Japanese yen is inevitable, in the long run, the overall trend of Japan's economic contraction is difficult to change.

Highly correlated with aggressive rate hikes by the Federal Reserve

Since the beginning of this year, the currencies of many G20 countries have continued to decline against the US dollar, with the Japanese yen falling by about 9%. As one of the international safe haven currencies, the decline of the Japanese yen has attracted attention.

The current round of yen depreciation actually began in early 2022. During the COVID-19, the Federal Reserve conducted an unprecedented "big release". In 2022, the Federal Reserve made a "sharp turn" and began to raise interest rates aggressively to cope with inflation, which brought serious negative spillover effects to the world economy. A variety of non US currencies depreciated significantly, forcing many central banks to raise interest rates. However, the Bank of Japan, which has always followed the trend of the United States, insisted on a negative interest rate policy due to domestic deflation.

With the rapid expansion of the interest rate difference between the Japanese yen and the US dollar, the Japanese yen exchange rate has plummeted all the way: at the beginning of 2022, the US dollar was about 115 yen to the US dollar; In October of the same year, the exchange rate briefly exceeded the level of 150 yen to 1 US dollar, and the yen fell by more than 30%. The Japanese government was forced to intervene three times to raise the yen exchange rate by selling the US dollar and buying the Japanese yen.

Last year, the Bank of Japan's reshuffle was seen by the outside world as a signal that Japan was about to tighten its monetary policy. In March of this year, the Bank of Japan announced the end of its 8-year negative interest rate policy, but only raised the policy rate from negative 0.1% to the range of 0 to 0.1%, while promising to continue maintaining a loose monetary environment. Due to the lower degree of tightening than market expectations, it has exacerbated the depreciation of the Japanese yen.

The US Department of Labor released March Consumer Price Index (CPI) data on the 10th, indicating that US inflation has not cooled. The market's expectation of a US interest rate cut within the year is adding to the uncertainty. Affected by this, the exchange rate of the Japanese yen against the US dollar in the foreign exchange market has significantly weakened, breaking records for several consecutive days since 1990.

Devaluation causes people's wallets to shrink

In order to pursue higher returns, personal funds in Japan are flowing overseas one after another. Overseas institutional investors engage in arbitrage trading, borrowing yen to exchange for foreign currency for investment, which also exacerbates the depreciation of the yen. Japanese Finance Minister Makoto Kanda has repeatedly intervened verbally, stating that there is "obvious speculation in the current market that cannot be tolerated.".

Japanese Finance Minister Toshiichi Suzuki stated on the 23rd that "there will be no option to properly respond to excessive volatility.". According to Kyodo News Agency, Junichi Suzuki hinted at intervening in the foreign exchange market to prevent further depreciation of the yen.

In addition, since the beginning of this year, the Japanese stock market has been booming, and many people believe that the Japanese economy has experienced a strong recovery. In fact, most of the investors who are buying Japanese stocks are foreign institutional investors, and the Japanese people have not become financially well-off. Professor Yuri Shirai from Keio University stated in a media interview that the excessive depreciation of the Japanese yen has led to a decrease in consumer purchasing power, resulting in a slowdown in corporate investment and production.

As of March this year, Japan's core consumer price index (CPI) has risen year-on-year for 31 consecutive months, but this round of inflation has not been accompanied by high domestic demand. In fact, the increase in wages in Japan cannot keep up with the increase in prices. As of February this year, actual wage income has been declining year-on-year for 23 consecutive months. In the words of Uniqlo President Masao Yanai, it is normal for ordinary people to be unwilling to buy things in this situation. According to data from the Japanese Cabinet Office, as of the fourth quarter of last year, personal consumption, which accounts for more than half of the Japanese economy, has shown negative growth for three consecutive quarters.

Due to a decrease in actual income, consumers tend to choose cheaper products: in supermarkets, beef sales have plummeted, while chicken is in high demand; The domestic shipment volume of ultra-thin televisions in Japan has been declining for three consecutive years. Recently, due to the escalating tensions in the Middle East, international crude oil prices have once again risen. Nomura Institute of Comprehensive Research economist Teruyuki Munuchi believes that the combination of rising energy prices and the depreciation of the Japanese yen will lead to a stronger headwind for the Japanese economy, and rising prices may further suppress personal consumption, thereby exacerbating stagflation.

How long will the Japanese yen continue to fall

The depreciation of the Japanese yen this round is not entirely caused by the aggressive interest rate hikes by the United States, and some structural problems that have long existed in the Japanese economy are also important reasons.

Firstly, Japan heavily relies on imports for important resources such as energy, food, and raw materials, leading to a sustained increase in demand for the US dollar. After the Fukushima nuclear power plant accident in 2011, domestic nuclear power plants in Japan were shut down one after another. Nuclear power, which originally accounted for about a quarter of Japan's annual power generation, dropped to zero in 2014. Since then, the slow progress in restarting nuclear power has led to a further increase in demand for energy imports.

Secondly, Japan's trade in goods and services continues to experience deficits. The latest data shows that from fiscal year 2021 to fiscal year 2023, Japan's goods trade has shown a trade deficit for three consecutive fiscal years; Although the situation in 2023 has eased compared to the previous year, the total trade deficit in goods and services is still 9.8 trillion yen.

Several experts have pointed out that although inbound tourism is doing well against the backdrop of the depreciation of the Japanese yen, with the deepening development of artificial intelligence technology, Japan's service fees paid overseas will significantly increase, and the problem of service trade deficit will become more apparent.

Thirdly, although overseas investment returns are abundant, the amount of returned funds tends to decrease. Due to the sluggish domestic demand and shortage of manpower in Japan, Japanese companies continue to expand their overseas investment scale, resulting in huge profits and a lack of motivation to return to China for investment. They generally choose to store profits overseas.

When it comes to the future trend of the Japanese yen exchange rate, experts analyze that although the yen is currently in an extremely weak state, the trend of the Federal Reserve and other European and American central banks choosing to cut interest rates in the future and the Bank of Japan slowly raising interest rates will not change. "One drop and one rise" is conducive to the appreciation of the yen. Ding Ke, Director of the Asian Economic Research Institute of the Japan Trade Revitalization Agency, believes that the appreciation of the Japanese yen is inevitable in the future, and the Tokyo stock market may face resistance if it continues to rise. Although Japan's position in certain aspects of the supply chain is still irreplaceable, the long-term trend of economic contraction in Japan is difficult to change due to the difficulty of reversing the aging population with fewer children.