In the Tokyo foreign exchange market, the yen temporarily exceeded 149 yen on the 19th, and the yen is about to hit the psychological Maginot Line of 150 yen to the dollar.
The yen exchange rate is about to hit the psychological Maginot Line of “1 dollar = 150 yen level”. The market sees a collapse of 150 yen as “a matter of time” as there is no concrete means to reverse this trend. Some warn that if this situation continues, it could lead to chaos similar to the Asian currency crisis of 1997-1998.
On the 19th, in the Tokyo foreign exchange market, the yen exchange rate temporarily exceeded 149 yen to the dollar, the lowest since August 1990. The yen has already fallen for nine consecutive weeks. NHK reported that the U.S. government has continued to raise interest rates sharply in order to curb record-breaking inflation, and that the yen is gradually depreciating as the interest rate differential between Japan and the U.S. widens.
However, the Japanese government lacks effective policy tools to reverse this trend. Japan’s Ministry of Finance embarked on a “foreign exchange intervention,” selling the dollar and buying the yen for the first time in 24 years, on March 22, when the yen exchange rate hit the upper-145 yen level, but it did not last long. Despite the hard-line method of direct intervention, it was not very effective, and it is not easy to take out this card again.
The only way left is for the Bank of Japan to decide to raise interest rates. This is because the difference in interest rates between the United States and Japan is the essential reason why the yen is currently depreciating. But US President Joe Biden told reporters on Wednesday, “I’m not worried about a strong dollar. The (US) economy is strong.” It has made it clear that it does not consider the situation of alliances and third world countries that are suffering from a strong dollar.
In that case, the Bank of Japan should proceed with rate hikes, but Bank of Japan Governor Higashi Kuroda is sticking to his traditional negative stance on rate hikes. Governor Kuroda also attended a meeting of the House of Councilors Budget Committee on the same day, and expressed a strong sense of caution, saying, “The recent depreciation of the yen is rapid and one-sided, and is negative for the Japanese economy. However, he insisted that monetary easing would continue, stating that “a stable depreciation of the yen would be positive for the economy as a whole.”
There are two main reasons why the Bank of Japan cannot raise interest rates. First, it is the same as the reason given when implementing the monetary easing policy called “Abenomics” in April 2013. In a situation where the economy should be buoyed by depreciating the yen, raising interest rates could throw cold water on this trend. Second is the enormous government debt, which amounts to 1016 trillion yen (approximately 256% of Japan’s gross domestic product). Even a small interest rate hike will snowball the interest burden that the Japanese government must pay.
Combined with the rise in raw material prices caused by Russia’s invasion of Ukraine, households and businesses are suffering more and more. According to the Nihon Keizai Shimbun, “According to a survey on lifestyle attitudes recently released by the Bank of Japan, inflation felt by consumers reached 10% over the year. ” he pointed out. The Japanese Corporate Goods Price Index, which shows the price trends of goods traded by companies, was 116.3 as of September, up 9.7% from a year ago and hitting a new high. The Japanese government is calling on companies to raise wages to overcome this situation.
Some have warned that the 1997-1998 Asian currency crisis-level economic slump could return. In a recent interview with Bloomberg, Jim O’Neill, former chief currency economist at Goldman Sachs, said, “If the dollar breaks out of 150 yen, we may see a level of turmoil at the level of the 1997 Asian currency crisis. No. It will be a trigger point for capital to leave Asia en masse.”
Tokyo/Correspondent Kim So-yeon (contact [email protected])
Translated by HJ