In the midst of global inflation, the Japanese Yen has been weakening throughout the year. At the beginning of 2021, the yen was 104 against the US dollar. In March 2022, the yen was 115 yen to the dollar, and it continued to drop to 130 to the dollar in April. On October 20, the yen fell below 150 against the dollar, hitting a 32-year low.
The widening gap between Japanese and US interest rates was a major reason for the depreciation of the yen, because it makes it easier to sell the yen in the market. Moreover, the current weakness of the yen was accelerated by higher fuel costs after the outbreak of the Russo-Ukrainian war in February this year. However, it is difficult for the Bank of Japan to increase the interest rate, as this will have a devastating effect on the Japanese economy.
Japanese Finance Minister Suzuki Shunichi stated that a weaker yen could have a negative impact on the economy, describing it as “bad soft weakness”. Similarly, Japan’s chief currency diplomat, Kanda Masato of the Ministry of Finance, explained, “The disadvantage of a weak yen is that it raises the cost of importing energy and food, thus increasing the burden on the family.”
On July 12, 2022, Suzuki had a meeting with US Treasury Secretary Janet Yellen and they agreed to address rising food and energy prices. Notably, Yellen expressed Washington’s view that Tokyo’s intervention in the currency can only be justified in “rare and exceptional circumstances.”
On September 22, the Kishida administration finally intervened in the foreign exchange market by buying the yen for the first time in 24 years. The Japanese government intervened in the market in 1998 after the Japanese economy was depressed as a result of the consumption tax increase from 3 percent to 5 percent. Regarding the possibility of further intervention, Kishida stated that Tokyo “will continue to take decisive steps against excessive moves in the currency.”
The effect of the yen-buying intervention was temporary, and the Kishida administration as well as the Bank of Japan intervened in the foreign exchange market again on October 21. It was a “covert interference,” Kanda said.[w]He will not now comment on whether we made an intervention or not.”
From Sept. 29 to Oct. 27, the Japanese government spent 6.34 trillion yen on intervention buying the yen to stop the currency’s decline against the US dollar. Regarding the ongoing intervention into buying the yen, Suzuki commented, “We are doing this to maximize effects to reduce sharp fluctuations in the currency.” Foreign exchange rate intervention was effective but only temporary because there was a gap in interest rates between Japan and the United States. On October 24, The Washington Post argued that “it is time to believe that Japan accepts a weaker yen.” Meanwhile, the Japan Times reported on Oct. 26 that Yellen had respected Tokyo’s decision on covert intervention in foreign exchange markets.
On November 15, the Japanese Cabinet Office announced that Japan’s GDP contracted for the first time in four quarters from July to September of 2022, indicating an annual decline of 1.2 percent, due to the impact of inflation and a weaker yen. On November 18, the Nikkei Asia Index highlighted that inflation in Japan hit a 40-year high due to higher import costs as a result of a weaker yen. Upon hearing this news, The New York Times emphasized the point that Japan’s economy had contracted “unexpectedly” as a result of the depreciation of the yen.
However, at the same time, it should be noted that a weaker yen can have a positive effect on the economy in the long run. Honda Yuzu, a professor at Osaka Gakuen University, notes, “Products made in Japan are easier to sell and relatively inexpensive compared to foreign products in all world markets, including the domestic market. This is good for the Japanese economy as there is a constant lack of demand.”
Meanwhile, a weaker yen may have a negative impact on Japan’s economic security as well. In an article published by the Asahi Shimbun on February 1, Kanda commented that the Ministry of Finance will “intensify efforts on this front, such as increasing the number of employees who oversee economic security.”
Suzuki Kazuto, a professor at the University of Tokyo, warned that a weaker yen would have a negative impact on Japan’s economic security in the future. In an interview with the Weekly Economist published by the Mainichi Shimbun on May 23, Suzuki warned that Tokyo would need to be concerned about potential purchases of Japanese companies by foreign entities in the context of a weaker yen. He also noted that it is possible for foreign entities to buy Japanese land, although the possibility is slim, as it was restricted by the amended Foreign Exchange and Foreign Trade Law in 2019.
The prolonged depreciation of the yen affected the lifestyle of the Japanese both inside and outside the country. Japanese diplomats were concerned about the impact of a weaker yen on their savings and living standards abroad. As a Japanese diplomat said, “Prices here continue to rise. If the yen continues to weaken, I am concerned that it may affect my child’s education and other costs.” Another Japanese diplomat complained, “When salaries go down in society in general, so do allowances [Foreign Ministry] The staff is also reduced. Difficult to raise payments.” In other words, a weaker yen could have negative effects not only on the Japanese economy but ultimately on the quality of Japanese diplomacy.
While prolonged inflation is a global trend, the Bank of Japan views “current inflation as temporary and maintains its expansionary monetary policy.” Inflation in Japan rose to 3 percent in September, but it remains small compared to 8 percent in the United States and 10 percent in the United Kingdom. On September 15, World Bank Group President David Malpass expressed concerns: “Global growth is slowing sharply, with the potential for further slowdowns as more countries enter recession. My deep concern is that these trends will continue, with devastating long-term consequences for people.” in emerging markets and developing economies”. On Oct. 11, Pierre-Olivier Gourenchas, Economic Adviser and Director of Research at the International Monetary Fund, argued that “policymakers need a steady hand as storm clouds gather over the global economy.”
Obviously, a “perfect storm” of global recession and recession is approaching the world economy, and Japan has been trapped in quantitative easing as well as the interest rate gap between Japan and the United States. At the same time, you should be aware that a global recession is likely to occur in a period of geopolitical power transition. In an era of Sino-US rivalry in the Indo-Pacific region, the potential for a Kindleberger trap, as Joseph Nye Jr. has argued, has profound implications for the global economy and global politics. Hence, Japan should take effective measures against yen depreciation and beware of global recession as well as the Kindleberger trap, which has come dangerously close.