The Japanese yen in a turbulent global economy
The Japanese yen in a turbulent global economy
WRITTEN BY DR SEOHEE PARK
18 April 2024
In November 2023, the Japanese yen (JPY) fell to a 33-year low since July 1990 of 151.74 yen to the US dollar (USD). As one of the historically most traded currencies, the yen’s valuation has long been a barometer for global economic sentiments. Recent fluctuations in its value, especially against the USD, raise concerns about broader implications for Japan’s domestic economy and international relations. The currency’s exchange rate affects not only the competitiveness of Japan’s exports and the cost of imports but also the valuation of its substantial international investments and external wealth. These factors influence Japan’s monetary policy, corporate profits, consumer prices, and its standing in the global financial sector.
Amid global shifts such as rising inflation rates and changing central bank policies, the JYP’s performance could redefine Japan’s geopolitical strategies and economic stability. Conventionally, like the Swiss franc (CHF), the yen has been perceived as a ‘safe-haven’ currency, attracting investors during periods of global uncertainty. This status is rooted in Japan’s and Switzerland’s economic stability, low sovereign risk, and significant role in international trade and finance. Nonetheless, recent trends have seen the yen depreciate, influenced by divergent monetary policies, global crises, and domestic factors.
During similar episodes before 2022, there was a 70 per cent likelihood of the yen strengthening against the USD within weeks, but the yen’s trend deviated from this pattern in 2023. The yen continued to depreciate amid Japan’s persistent ultra-loose monetary policy, contrasting sharply with the aggressive interest rate hikes and tightening measures of the US Federal Reserve and the European Central Bank. The yen’s steep decline underlines Japan’s economic challenges, especially its vulnerability to international market volatility. It emphasises the urgent need for adaptive fiscal strategies to mitigate the impact on trade and investment.
Historical fluctuations of the yen
The yen has been volatile over the past decades, influenced by domestic events, global crises, and shifts in trade dynamics. The 1990s were a “lost decade” as Japan grappled with asset price collapse and a banking crisis that saw the yen's value fluctuate widely. During the 1997-98 Asian Financial Crisis, the yen’s depreciation from around 80 to 140 against the USD worsened Japan’s economic downturn by diminishing exports due to the regional crisis and revealing systematic banking frailties, which ultimately restricted the effectiveness of the country’s monetary policy. However, in contrast to other Asian currencies, the yen appreciated during the 2008 global financial crisis from over 124 in June 2007 to 108 to the USD in August 2008 and below 90 by December 2009, mainly due to repatriation and liquidity crises in the West fuelling demand for the yen. Japan’s exports fell by 45 per cent, resulting in a subsequent 10 per cent depreciation of the yen, reflecting the severe downturn in the country’s export-reliant economy.
Japan’s currency policy will continue to be a subject of international scrutiny as it is intertwined with the country’s strategic choices in an interconnected global economy.
The yen’s stunning appreciation to a post-war record high of 76.25 against the USD after the East Japan earthquake in 2011 was paradoxical, considering the massive reconstruction costs and domestic economic uncertainties. Yet, the yen’s perceived safe-haven status, Japan’s trade surplus, and the repatriation of funds by Japanese firms to cover disaster-related costs drove up its value. The yen’s unexpected rise can be partially attributed to domestic investors, including the so-called ‘Mrs. Watanabe’ (housewives trading currencies to counter low-interest rates at home). Their collective moves reflect Japan’s complex economic dynamics and reinforce the yen's status as a safe-haven currency, backed by the country’s trade surplus that creates a net flow of money into Japan, supporting the currency’s value. Repatriating their overseas investment also increased demand for the yen, further safeguarding the yen’s appeal as a safe-haven currency amid global economic crises.
Recent volatility and domestic consequences
During the 2020 COVID-19 pandemic and the subsequent Ukraine conflict, the Bank of Japan’s (BOJ) monetary policy diverged from global trends, leading to a weaker yen. Its ultra-loose stance kept short-term rates negative even when the inflation rate neared that of other states. In contrast, central banks such as the US Federal Reserve and the European Central Bank were moving to tighten their policies in response to peaking inflation. The historical context suggests that the yen’s fluctuations are closely linked to Japan’s internal policy decisions and external global economic pressures. However, in the second half of 2023, the yen reached a 33-year low against the USD, only to appreciate rapidly after indications that the BOJ might shift its monetary policy to combat deflation, a concern in Japan since the ‘lost decades’. This volatility has had a mixed impact on the domestic economy, aiding exporters but contributing to inflation and promoting the BOJ to consider policy changes. The yen’s fluctuations have a tangible effect on Japan’s economic landscape, affecting everything from corporate earnings to consumer prices.
While a weaker yen theoretically benefits Japanese exporters by making their products more price-competitive abroad, the reality is different. The benefits are offset by the higher costs of importing raw materials and the inflationary pressure on domestic prices, leading to problems for ordinary Japanese households. Over the past two decades, the persistent deflation in Japan has favoured creditors and burdened debtors with increased debt values. Exporters have struggled with capital investments, reducing Japan’s international competitiveness.
Reflecting on Keynesian economics, the ‘animal spirits’ — a metaphor in economics for the instincts and emotions influencing human behaviour — that underpin investment decisions and drive entrepreneurship can be seen in this context. John Maynard Keynes recognised the role of inflation as a dual-edged sword, potentially a covert fiscal tool historically used to avert state insolvency. Today's Japan, grappling with these Keynesian dynamics, anticipates consumer price inflation, albeit modestly at two per cent annually, a cautious yet strategic attempt to stimulate economic activity and prevent deflationary stagnation. Yet, short-term interest rates remain low, suggesting persistent inflation taxation on savings, which disproportionately affects households, and is seen as the backbone of investment in the traditional Keynesian classification. Households, therefore, need to actively engage in asset defence to avoid falling victim to inflation. This economic manoeuvring indicates Japan’s sophisticated balancing act between Keynesian economic principles amid contemporary fiscal challenges. The prevailing monetary easing policy, a legacy of “Abenomics” initiated by former Prime Minister Shinzo Abe, aimed to invigorate economic activity by discouraging savings through negative interest rates. While this policy initially spurred business conditions, the prolonged weakening of the yen has culminated in substantial depreciation, contributing to the recessionary pressures observed today. As Japan faces this economic quagmire, the government’s fiscal policy and the BOJ’s monetary stance must delicately balance between stimulating growth and curbing the inflationary erosion of household wealth.
Japan’s geoeconomic strategy in response to currency fluctuation
The value of a state’s currency is more than a metric of economic health; it is a pivotal element in the strategic game of international influence and power. Japan is aware of the yen’s sway in this arena and has begun to recalibrate its approach to monetary policy, considering both domestic economic stability and broader geopolitics.
Historically, Japan has seen the impact of currency fluctuation on its international standing. The Plaza Accord of 1985 is a case in point, where Japan and other G5 nations agreed to intervene in the currency markets to depreciate the USD. This agreement was a strategic move to correct trade imbalances unfavourable to American interests. The subsequent appreciation of the yen reshaped Japan’s economic landscape, temporarily increasing its global economic stature and setting internal asset bubbles in motion.
The BOJ’s adherence to ultra-loose monetary policy and negative interest rates, even amid global trends towards tighter monetary control, reflects a complex response to domestic economic challenges rather than a deliberate strategy to devalue the yen. Such a stance by the central bank in Tokyo sheds light on balancing the need for economic stimulus against the backdrop of a global financial environment, which is increasingly favouring tightening. It is not merely a redux of the 1980s, the era of neoliberalism, but a more sophisticated strategy in response to the diversified economic challenges of the 2020s, such as stagnant wage growth, a deflationary mindset deeply embedded in the economy, and the risks associate with an ageing population in Japan.
Ultimately, the BOJ recently ended its negative interest rate policy, marking a significant shift in Japan’s economic strategy. However, the yen’s further decline despite the BOJ’s policy change signifies market concerns about the country’s economic outlook and underlines that additional or even more assertive monetary interventions are required to stabilise the currency. This move is set against Japan’s gradual recovery from long-standing deflation and a newly negotiated wage growth. Japan’s currency policy will continue to be a subject of international scrutiny as it is intertwined with the country’s strategic choices in an interconnected global economy. The yen’s fluctuations will persist as a barometer of its economic health, a reflection of domestic policy decisions, and a factor in the international economic narrative. How Japan will position itself in the ever-changing global economic dynamics depends on the BOJ’s path forward on domestic economic recovery.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Dr Seohee Park is a postdoctoral research fellow at Tohoku University in Japan and has been teaching International Relations at the Ritsumeikan Asia Pacific University. Her research focuses on political economy, especially the intersection of geoeconomics and the high-tech industry in the Indo-Pacific region. Image credit: Unsplash/Anne Nygard and Engin Akyurt.