The Unstoppable Depreciation of the Yen: Reasons and Serious Implications

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One of the significant challenges currently shaking the Japanese economy is the relentless depreciation of the yen.

While traditionally influenced by the interest rate differentials between Japan and the United States, recent trends suggest that this alone cannot adequately explain the reasons behind the yen’s depreciation.

This article delves into the factors driving the depreciation of the yen and the detailed repercussions it poses.

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The Progression of Yen Depreciation and its Background:

The yen is currently hovering around 151 yen to the dollar, approaching the 152 yen mark for the first time in approximately 33 years.

Conventional wisdom attributes yen movements to the interest rate differentials between Japan and the U.S.

However, the current situation in the U.S., characterized by sluggish inflation and a decline in long-term interest rates with no clear prospect of additional rate hikes by the Federal Reserve (FRB), challenges this conventional understanding.

The complex interplay of factors, including Japan’s economic conditions and monetary policies, is now governing the yen’s depreciation.

Example:

The unexpected reversal in the interest rate differentials, with the U.S. long-term interest rates dropping to 4.6%, while the Bank of Japan contemplates easing adjustments, contributes to the prevailing yen depreciation.

Underlying Weakness in the Economic Foundation behind Yen Depreciation:

While foreign exchange rates are believed to reflect a country’s fundamentals, the ongoing yen depreciation is not only a result of the weakness in the U.S. economy but also the feeble nature of Japan’s domestic consumption.

Market experts express skepticism that interventions or easing adjustments by the government or the Bank of Japan can curb yen depreciation, further exacerbating the situation.

Specific Example:

Major corporations, experiencing unprecedented losses, can absorb the impact due to their size.

However, this poses an insurmountable challenge for small and medium-sized enterprises (SMEs). The market is increasingly concerned about the economic downturn triggered by yen depreciation, creating a consensus that avoiding further yen depreciation is becoming difficult.

Limits of Government and BOJ Influence in the Foreign Exchange Market:

Despite efforts by the government and the Bank of Japan to intervene in yen depreciation, their impact remains limited. Market predictions suggest that even with interventions or easing adjustments, yen depreciation cannot be controlled.

This underscores market skepticism towards Japan’s economic strength and resilience, indicating that external interventions yield only limited effects.

Insight:

The observation by the head of foreign exchange research at a German bank, likening the yen to currencies like the Turkish lira and Argentine peso, suggests that Japan’s economic weakness is transparent in the market.

Effective yen depreciation countermeasures require alternative approaches and strengthening the economic foundation rather than relying solely on government and central bank interventions.

Impact of Yen Depreciation on Companies and the Economy:

As yen depreciation progresses, both companies and the overall economy face severe consequences, particularly for SMEs.

The disparity in profit-taking mechanisms between large and small enterprises becomes evident, with large corporations able to adjust to yen depreciation while SMEs struggle, increasing the risk of bankruptcies.

Concrete Impact:

Major corporations, like Nitori, recording unprecedented losses due to yen depreciation, reveal the stark difference in resilience between large and small businesses.

Bankruptcies, driven by yen depreciation, are on the rise, especially with the surge in food prices.

Cascade Effect of Yen Depreciation on Economic Weakening:

Yen depreciation not only impacts companies but also contributes to the weakening of the overall Japanese economy.

Statistics indicate an increase in “yen depreciation bankruptcies,” with food price hikes attributed to the phenomenon.

If this trend persists, Japan’s economic vulnerability will intensify, and the cascading effects of yen depreciation are expected to spread.

Conclusion:

In light of the yen’s impact on the Japanese economy and its citizens, a comprehensive approach to counteracting yen depreciation is imperative.

Collaboration between the government, the Bank of Japan, corporations, and citizens is crucial in devising effective strategies to halt the progression of yen depreciation, presenting an urgent challenge for all stakeholders.