Opinion | Is the falling Japanese yen cause for concern?

As the US dollar surges, Japan’s yen is at its weakest in decades, driving speculation in foreign exchange markets

So far, the Bank of Japan has shown no signs of changing course on interest rates, but if it does, markets could be in for a roller-coaster ride

Reading Time:4 minutes

A man passes a monitor showing the exchange rate of the Japanese yen against the US dollar in Tokyo on July 14. Photo: Reuters

Published: 12:30am, 30 Jul 2022Updated: 1:27am, 30 Jul 2022

It never rains but it pours. Every day this summer, we have been bombarded with bad news: raging forest fires, the relentless war in Ukraine, shootings in multiple cities, monkeypox and rising debt distress all over.

The good news for some is that the US dollar is stronger than ever. But that may be bad news for others. At the G20 finance ministers and central bank governors’ meeting in Bali last week, there was concern that currency volatility could drive instability in emerging markets.

The dollar is strong because the euro, yen and even the yuan are weakening. In times of global geopolitical uncertainty, and with the US Federal Reserve raising interest rates, the dollar is an attractive “safe haven” currency.

The euro is understandably weak: in addition to the war, there are gas shortages, rising inflation and widening fiscal deficits. China, meanwhile, is struggling to recover from months of Omicron-driven lockdowns. The country’s growth is at its slowest in more than four decades, excepting 2020.

Then there is the yen. Japan’s currency fell to 137 to the dollar in June, its lowest value in more than 20 years, and 16 per cent lower than at the beginning of the year. Three possible reasons for this drop have been given: the oil shock from the Ukraine war; the difference between the Bank of Japan’s monetary policy and those of other major central banks; and the possible return of “Mrs Watanabe”. Let’s deal with the two simpler reasons first.

A customer holds a 1,000 yen banknote at a supermarket in Tokyo on June 27. Photo: Bloomberg

Japan is a major energy importer, so higher oil prices increase its trade deficit, meaning a greater outflow of yen. But Japan maintains an overall surplus thanks to foreign investment assets worth more than US$3 trillion, meaning it is one of the world’s largest net lenders. As the country’s population ages (with a median age of 48 years), earnings on accumulated savings keep the balance of payments in surplus, so increased energy spending should not have too much of an impact on the yen rate.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x