Historically, the Japanese yen has served as a safe haven against the risks of economic hardship, but recent data suggests that the yen has weakened. This is causing concern for many. The Bank of Japan (BOJ) has been trying to correct a chronically low inflation rate, and this trend has continued in recent months. However, the BOJ’s monetary policy remains at the ultra-easy end of the spectrum. This is not sustainable, and the Japanese government needs to get serious about taking action.
The yen has declined to the lowest level against the dollar in over two decades. In fact, it is the weakest currency against the US dollar since 1998, when a coordinated yen-buying campaign took place. However, this is not the only concern for the Japanese government. The nation’s ongoing trade and current account deficit is also causing the yen to fall. These deficits are affecting the value of the yen, and this is a negative factor for many Japanese companies. Consequently, a decline in the yen could make Japanese companies more competitive. However, the decline could also lead to some negative effects for Japanese utility and food companies.
The Bank of Japan has pledged to continue to keep interest rates ultra-low. However, the central bank has indicated that it may need to do more to cement inflation in the minds of consumers and businesses. This is a key issue because a recession could cause the US dollar to weaken. If the Federal Reserve follows the path of most other central banks, which are raising interest rates, the rate gap between the two countries will increase, causing further pressure on the yen.
The Bank of Japan has pledged repeatedly to keep its 0.25% cap on Japan’s 10-year government bond yield, which is lower than the US rate. However, the central bank is still a long way from reaching its goal of 2% inflation. It is expected that inflation will fall below the target in April 2023, and the BOJ will need to do more to ensure that inflation stays above 2% for the long term.
Despite the BOJ’s continued efforts to keep the yen strong, some analysts say that the yen is losing its appeal as a safe haven. The BOJ has also said that it will continue to maintain its 0.25% cap on domestic bond yields, but the central bank’s monetary policy will have to adjust to FX moves. It is expected that the rate gap between the two countries will continue to widen.
The Japanese government is also trying to dampen volatility, as the economy is experiencing a number of problems. In particular, energy prices are climbing, and these costs are beginning to impact terms of trade. This is causing more companies to increase imports of goods from Japan. This will also cause higher utility costs for the tourism sector. The government has also announced that it will relax the Covid-19 travel measures, which will have a positive impact on consumer spending in Japan.
