Weekly Brief: Weak Yen's Impact on Japan’s Economy

Background

The Japanese yen continues trading at its weakest levels to the dollar. Regardless of how Russia’s invasion of Ukraine displeased the global economy, the yen has fallen more than other major currencies, signifying that it may be losing appeal as a safeguard during turmoil times. According to Bank for International Settlements, the yen experiences an ongoing decrease in the real effective exchange rate*.

*The real effective exchange rate compares a nation's currency value against the weighted average of the currencies of its major trading partners. It is an indicator of the international competitiveness of a nation.

JPY to USD Chart for 5 years

What does it mean to be a weak currency?

Now, the yen is considered a weak currency.

To differentiate what it means to be a strong and weak currency:

Stronger Yen: When the exchange rate is 1 USD = 85 JPY, more U.S. dollars can be obtained for the same amount of yen than when the rate is 1 USD = 100 JPY.

Weaker Yen: When the exchange rate is 1 USD = 125 JPY, fewer U.S. dollars can be obtained for the same amount of yen than when the rate is 1 USD = 100 JPY.

In general, these are the pros and cons of a weak currency:

Pros	Cons
Country’s exports become cheaper and more competitive compared to those in stronger currencies → boost sales and create jobs in the export sector → see economic growth	Import’s become more expensive
With more exports → improvement in current account deficit	May result in inflation because more currencies are required to purchase goods, a spike in inflation will happen if the country has more imports than exports.
Self-correcting	A self-perpetuating cycle of slowing economic activity, when consumers and businesses expect the constant regular price declines due to the weak currency

Weak Yen’s impact on Japan’s Economy

Is it favorable for Japan’s economy: trade?

According to the World Bank in 2020, Japan is ranked 4th in terms of exports of goods and services. Japan can be considered as an exports-focused economy.

Even though a weak yen had been favorable for Japan’s exports but with a shift of Japan’s manufacturers to offshore production (a quarter of Japanese manufacturers use offshore production in 2020), a weak yen has rather weighed on profits at companies dependent on raw material imports. Although the yen continued to lose significantly to the dollar, export volumes remained mostly unchanged, suggesting a weaker currency has not necessarily made the country's goods more attractive to foreign buyers. With the 2011 earthquake and tsunami, along with the ongoing pandemic from 2020, Japan turned into a trade deficit as exports slowed and imports of fuel surged.

Is it favorable for Japan’s economy: consumers?

A weak currency will push up the prices of imports. The yen’s lowering value pushed up prices of brand-name imports ranging from luxury cars to expensive watches to smartphones as well as foodstuff.

The price of a new-model iPhone has tripled over the past decade, equivalent to 60% of the average monthly salary in Japan. Over that period, salaries have remained broadly unchanged. A weak currency has devitalized the household’s purchasing power. This is taking a toll on the consumer’s demand, which may be detrimental to economic growth.

What next?

With the US Federal Reserve signaling more interest rate hikes for 2022, it is possible that the yen will continue to fall with the dollar becoming a stronger currency. Since increases in interest rates throughout the economy will attract investment from investors abroad, global investors will most likely sell their investments in their local currencies in exchange for U.S. dollar-denominated ones.

Japan’s former top currency diplomat Hiroshi Watanabe has also argued that any tightening monetary policy or intervention of the currency market may do little or be detrimental to the yen.

There are of course many other ways to potentially save Japan’s economy, but the weak yen might not be the one.

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References

GAKUTO, T., & SAEKI, R. (2022, January 20). Yen’s lost decades: Japanese buying power sinks to near 50-year low. Nikkei Asia. https://asia.nikkei.com/Business/Markets/Currencies/Yen-s-lost-decades-Japanese-buying-power-sinks-to-near-50-year-low

GAKUTO, T., TAMURA, T., & NAKAMOTO, D. (2022, March 15). No longer a safe haven, once-mighty yen slumps. Nikkei Asia. https://asia.nikkei.com/Business/Markets/Currencies/No-longer-a-safe-haven-once-mighty-yen-slumps

HAYES, A. (2021, June 30). Real Effective Exchange Rate (REER). Investopedia. https://www.investopedia.com/terms/r/reer.asp#:%7E:text=The%20real%20effective%20exchange%20rate%20(REER)%20is%20the%20weighted%20average,each%20country%20in%20the%20index.

Henry, D. (2022, March 15). Dollar firms as oil prices moderate, taking momentum from euro. Reuters. https://www.reuters.com/business/all-eyes-approaching-fed-meet-yen-slips-further-2022-03-15/

Kajimoto, T. (2021, November 26). Analysis: In Japan, a weaker yen may not be the blessing it once was. Reuters. https://www.reuters.com/markets/currencies/japan-weaker-yen-may-not-be-blessing-it-once-was-2021-11-26/

Kihara, L., & Takemoto, Y. (2022, March 17). Rate hike, intervention can’t reverse weak yen, says former Japan currency diplomat. Reuters. https://www.reuters.com/world/asia-pacific/rate-hike-intervention-cant-reverse-weak-yen-says-former-japan-currency-diplomat-2022-03-17/