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The earthquake with a maximum intensity of 7 that occurred in Noto, Ishikawa Prefecture on January 1, 2024, has significantly impacted the Japanese economy and the foreign exchange market.
Alongside this earthquake, the yen-to-dollar exchange rate has sharply declined, making it challenging to proceed with the Bank of Japan’s planned negative interest rate removal, as widely speculated.
The following will delve into the various factors triggered by this earthquake and its repercussions, focusing on its effects.
Impact of Yen Depreciation Due to the Earthquake
The earthquake’s occurrence has led to significant fluctuations in the foreign exchange market, with the yen-to-dollar exchange rate experiencing notable shifts. The seismic activity in Noto, reaching a maximum intensity of 7, plunged the market into an unstable state, prominently steering towards yen depreciation. Consequently, the rapid shift from the yen’s high levels on December 29, 2023, has raised concerns about its implications for the Japanese economy.
While foreign investors had anticipated the negative interest rate removal in January, the current situation indicates that it is highly unlikely for the Bank of Japan to make any significant moves in its financial policy decision meeting in January. The yen depreciation resulting from the earthquake is driven by factors outside the usual economic indicators, and attention is drawn to how this will influence monetary policy.
Detailed Impact on Financial Policy
The repercussions of yen depreciation due to the earthquake are significantly influencing the Bank of Japan’s financial policy. Originally, the outlook was for the normalization of unconventional easing, progressing towards a reduction in the interest rate differential between Japan and the United States. However, the earthquake’s impact has cast uncertainty over these prospects.
Regarding the observed yen depreciation following the earthquake, there is an anticipation that the yen will be viewed as a currency that responds conventionally to crises. In such a scenario, it becomes increasingly challenging for the Bank of Japan to remove negative interest rates in the financial policy decision meeting scheduled for January.
Impact on the Forex Market and Economy
The earthquake-induced yen depreciation is profoundly affecting the foreign exchange market and the Japanese economy. In the foreign exchange market, the trend of yen appreciation observed from December 29, 2023, abruptly shifted to a depreciation trend, reaching around 142 yen per dollar in the London market. This underscores the market’s instability.
The earthquake is expected to lead to a decline in production activities, and the government might consider preparing a supplementary budget for recovery measures. In this situation, skepticism arises regarding the Bank of Japan’s ability to progress with the initially planned normalization of financial policy by April, requiring market participants and economists to adopt a cautious approach.
Evolution of the Forex Market and Current Situation
Comparing the current situation with the past, the factors contributing to yen depreciation following the earthquake involve different elements. During the Great East Japan Earthquake, the yen temporarily rose to the 76 yen per dollar range but returned to the 85 yen per dollar range following interventions. However, in the current earthquake’s aftermath, changes in economic structures and international situations have resulted in diverse influences on the yen.
Given the approximately 30 trillion yen trade deficit over the past two years, expecting the same response as in the past is unrealistic. This indicates that the current Japanese economy is facing new challenges, deviating from previous patterns. While currencies are typically sought during crises, a new phenomenon is emerging where a national crisis leads to currency depreciation.
Future Outlook for the Earthquake and Financial Policy
The impact of the earthquake has rendered the future of financial policy uncertain. The heightened uncertainty about the future due to the earthquake has made the possibility of negative interest rate removal in January “almost non-existent.” On the flip side, positive factors, such as major companies announcing wage increases, create a balancing act for the Bank of Japan, demanding a cautious response.
The statement that the possibility of negative interest rate removal in January has become almost non-existent highlights the attention market participants are giving to future developments. Assessing financial policy requires striking a balance between the impact on regional economies and inbound activities, considering both negative and positive factors.
Conclusion
In summary, the yen depreciation caused by the earthquake is significantly impacting the Japanese economy and financial policy. Unlike conventional patterns, the involvement of new factors necessitates careful assessment by market participants and economists. The future developments in this context will undoubtedly be closely monitored.
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