[Tokyo 8th Archyde.com]- The strong dollar and the weak yen cannot be stopped. This move will further push up Japan’s import prices, keep the consumer price index (excluding fresh food, core CPI) high, and increase the downward pressure on private consumption. There is a growing view in the market that even if the yen-buying intervention is implemented during the implementation of ultra-loose monetary policy, the effect will be small, and the sentiment is growing that the yen may weaken further.
The start of a spiral starting from the depreciation of the yen is trying to increase the downward pressure on the Japanese economy as if it were a world apart from Japan in the past. A phenomenon that is inconvenient for the government and the Bank of Japan is appearing before our very eyes.
The dollar/yen exchange rate hit 113.47 yen on January 24th this year, and the dollar strengthened while the yen weakened. On September 7, the yen depreciated to 144.99 yen. The yen fell about 27%. The unstoppable depreciation of the yen is about to upset the outlook of the government and the Bank of Japan.
When some economists initially predicted that the core CPI would rise at an accelerated pace, pointing out that it was likely to reach 3% year-on-year at some point, the government and the BOJ ignored it. However, with the recent acceleration of price hikes on food items and a wide range of other items, it seems that there are voices saying that an “instant touch” to 3% is possible.
However, it has not changed its view that core CPI growth will return to 1.5% from 1.4% in fiscal 2023. In its outlook report, the Bank of Japan has set the core CPI increase rate for fiscal 2023 at 1.4%.
However, the continued depreciation of the yen has prevented the rise in import prices from peaking out, and the possibility of pushing up import prices even in 2023 has emerged. Import prices in July increased by 48.0% from the previous year, which is a major factor pushing up domestic corporate goods prices by 8.6% from the previous year.
The rise in import prices, the rise in domestic corporate goods prices, and the rise in consumer prices are expected to have a time lag of six to nine months from the start of the depreciation of the yen. If the yen continues to depreciate, the core CPI is likely to remain at the 2% level even in 2023.
In addition, downward pressure due to high prices is gradually coming to the fore on consumer spending, which the government and the Bank of Japan had hoped would be the engine for the recovery of the domestic economy.
According to the July household budget survey released on the 6th of this month, real consumption increased by 3.4% from the previous year.
First, it was down 1.4% from the previous month, but when comparing July’s level with the April-June average, it was down 1.1%. If consumption in August and September stays the same as July, private consumption in the July-September quarter will decline by 1.1% from the previous quarter, which will push down the gross domestic product (GDP).
Given the sharp increase in the number of new coronavirus infections in August and the recent rise in prices, it is highly unlikely that private consumption will post a quarter-on-quarter increase in July-September. External demand cannot be expected to grow significantly due to changes in the Chinese economy.
Domestic prices are likely to increase their rate of increase toward the end of the year, and the real value of consumption may continue to decline.
The depreciation of the yen, the rise in prices, and the negative impact on consumption will likely become a considerable burden for the Japanese economy, whose real growth rate has fallen to the low 0% range.
A further problem is that short-term sources in Europe and the United States believe that the Japanese authorities cannot intervene. The Bank of Japan, which advocates the maintenance of ultra-easy monetary policy, has shut down any actions that would make the market “suspect” that the monetary easing policy might be exiting.
In addition, it is believed that the U.S. government, which has given top priority to combating inflation, will not accept a request from Japan to intervene to sell the dollar and buy the yen.
There are quite a few market participants who believe that even if Japan intervenes alone, even if it intervenes in the opposite direction while implementing ultra-easing measures, it will not be effective.
Under such circumstances, it seems that the view that buying the dollar and selling the yen is the most efficient way to obtain profits in a short period of time while controlling risks is spreading.
The spiral of rising prices and declining consumption triggered by the depreciation of the yen is a phenomenon that cannot be easily stopped, and is about to appear in front of many people.
If the depreciation of the yen, which is the starting point, stops, it will be when the US Federal Reserve Board (FRB) stops consecutive interest rate hikes. At least for the rest of the year, pressure on the yen to depreciate will likely continue.
How will the government and the Bank of Japan try to get out of this troublesome situation? According to domestic media reports, the government is considering spending 900 billion yen to provide 50,000 yen to households exempt from inhabitant tax.
However, compared to Germany’s 65 billion euro (about 9 trillion yen) package and the UK’s 130 billion pound (about 21 trillion yen) package as a support measure for people suffering from high prices, the scale and effect are considerable. It looks inferior. The extent to which Prime Minister Fumio Kishida feels a sense of crisis about the current state of the Japanese economy can be seen by looking at the content of his measures to combat high prices.
Background news
・ UPDATE 2- Real consumption expenditure increased for 2 consecutive months in July, and the number of people recovered without restrictions on movement
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