JAPAN WILL STRUGGLE TO RESCUE ITS PLUMMETING CURRENCY / THE ECONOMIST

A slip of the yen

Japan will struggle to rescue its plummeting currency

Expensive government intervention looks likely to provide only brief respite

The yen is on a wild ride. 

As Asian markets opened on April 29th, the currency plunged to a 34-year low of 160 to the dollar, adding to a hefty fall over the past three years (see chart). 

A sudden reversal to more like 155 to the dollar prompted rumours of intervention by the Bank of Japan (BOJ).

Confirmation will come with a delay, but preliminary data, based on the balances financial institutions hold at the central bank, suggest the BOJ may have spent over $30bn to strengthen the exchange rate. 

After subsequently weakening, the yen surged again on May 1st, raising more eyebrows among currency traders.

There is little long-term relief in sight. 

With inflation in America still above 2%, interest-rate cuts there are no longer expected soon, which has caused the dollar to strengthen. 

Although the BOJ in effect ended its policy of yield-curve control and raised its benchmark rate from between minus 0.1% and zero to between zero and 0.1% in March, the shift is small in an international context. 

Benchmark interest rates in America, Britain and the euro zone have risen by at least 4.5 percentage points since 2022. 

Investing in assets outside Japan simply provides higher returns.

Other factors reinforce the yen’s weakness. 

Japan is the world’s largest creditor, with huge investments overseas generated by thrifty corporations and households. 

Returns from investments abroad surged to ¥57trn ($400bn) in the year to February—more than double the amount a decade ago. 

Yet the firms involved do not seem to repatriate much foreign profit. 

Instead, as Karakama Daisuke of Mizuho Bank has noted, they reinvest overseas in assets that produce better returns, reducing demand for the yen. 

Mr Karakama even suggests that Japan’s current account may not actually have been in surplus, as official statistics indicate, in 2022 and 2023.

What does a weaker yen mean for Japan’s economy? 

The price of imported goods has climbed by an eye-watering 64% since 2020. 

Japan imports almost all its fuel, so businesses and households face much higher energy costs. 

And the impact on exporters is less positive than it once would have been. 

A falling yen may make goods produced at home cheaper, but today Japanese companies have sizeable operations in Europe, North America and South-East Asia. 

The greatest upside may now be for the tourist industry, as the slumping yen makes holidaying in the country cheaper. 

In February 2.8m travellers arrived, up by 89% from the same month last year and 7% from the same month in 2019, before covid-19.

A weak yen is unpopular with Japanese consumers, who suffer higher prices, and thus with politicians, too. 

The country’s central bankers also fret when the currency moves rapidly, and are loth to give speculators influence over monetary policy. 

Yet they lack good options. 

Neither the gap between Japanese interest rates and those in the rest of the world nor the behaviour of Japanese companies is set to change soon. 

BOJ officials have stressed the interest-rate rise in March is not intended to be the first of many. 

As a result, the future is one of further yen weakness, or of enormous and probably futile spending to prevent it.