Fumiyasu Akegawa, Chair & CEO DEVNET International/Japan
1. Weak Yen
The yen is rapidly weakening against the dollar in the foreign exchange market. In just two months from March to early May 2022, the yen depreciated by 16 yen against the dollar. On May 9, the yen hit 131 against the dollar, the highest level in about 20 years. In Japan, the Bank of Japan has continued its massive monetary easing, keeping long-term interest rates, a benchmark for corporate borrowing and mortgage rates, low. In the U.S. on the other hand, monetary policy has been tightened to contain historic inflation, and interest rates continue to rise. As a result, the interest rate differential between Japan and the U.S. has widened, and there is a growing trend to sell yen and buy dollars in order to invest assets in dollars with higher interest rates. For companies that export products overseas, a weaker yen leads to higher earnings. However, with energy and food prices soaring against the backdrop of the situation in Ukraine and other factors, the rapid depreciation of the yen may further push up import costs, putting pressure on the earnings of households and importing companies. Japan’s Finance Minister Shunichi Suzuki expressed caution, saying, “An environment in which the soaring prices of imports cannot be fully passed on to prices can be called ‘bad yen depreciation.’
2. Is the weak yen positive for the Japanese economy?
BOJ Governor Kuroda has indicated that he is ready to continue the large-scale easing, believing that “overall yen depreciation is positive” for the Japanese economy. If this assumption is in doubt, some modification of the easing will be necessary. At the April 28 press conference, Governor Kuroda also stated that “excessive fluctuation will have a negative impact,” seemingly echoing Finance Minister Suzuki’s view, who had already advocated the “bad yen” argument. If the BOJ does indeed have to take some action, what can we expect? (1) Revise the outlook for monetary policy in the direction of tighter monetary policy. (2) Shorten the target interest rate for the Bank of Japan’s manipulation of short- and long-term interest rates from 10 years to 5 years. These short-term issues are likely to be discussed. However, the only way to break the market’s demand for “the next move” is to raise interest rates to a positive level in one fell swoop. Only then will we be able to get a sense of the possibility of a “fundamental change” in the BOJ’s stance. However, if this were to happen, mortgage rates, which are the most important for the household sector, would rise, and this would be a political headwind that the Kishida administration cannot tolerate before the Upper House election. Therefore, the current situation is likely to continue until the end of July, when the election will be over. Is there anything we can do for the Japanese economy under these circumstances where the yen continues to weaken?
3. Removal of Entry Restrictions
At the April 27 meeting of the Council on Economic and Fiscal Policy in the Cabinet Office, a civilian member recommended the early resumption of “entry for tourist purposes,” which has not been permitted as part of the waterfront measures against the new coronavirus. During his visit to the U.K. in early May, Prime Minister Kishida also indicated that he intends to allow foreign nationals to enter the country for tourism purposes as early as June. The background to the shrinking current account surplus is due to the widening trade deficit resulting from soaring resource prices and the disappearance of the travel balance surplus resulting from the disappearance of inbound demand. If the travel balance surplus returns along with the lifting of the inbound ban, even if only slightly, it will provide a means of easing the yen’s selling pressure from the supply-demand side. In fact, considering the declining current account surplus, the travel balance surplus is now an important tool for acquiring foreign currency. Prime Minister Kishida has followed suit, stating that “capturing robust overseas demand will enhance the vitality of the economy and boost its long-term growth potential. Some may be concerned that the influx of foreign travelers will lead to a resurgence of the outbreak. However, China and Japan are now the only countries that continue to pursue policies that tighten the real economy by focusing on the number of new cases of infection. If this trend continues, Japan will be completely left behind in the global trend. What is the point of continuing to restrict the number of Japanese who leave for overseas trips and return home during the holidays if the opposite is not allowed? With all the concern about rising prices due to the weak yen, shouldn’t we be thinking about how to reverse this trend and create a positive movement? It may be unfortunate, but as the real income environment for Japanese people is deteriorating, it is only natural for them to rely on the wallets of foreigners. Foreign currency acquisition based on inbound demand is one of the few remaining trump cards for Japan’s economic recovery. First of all, it is necessary to remove the cap on the number of incoming visitors.
4. What would happen if the yen depreciated to 150 yen per dollar?
But what would happen if the yen continued to depreciate further, even to 150 yen per dollar? For example, foreign workers: A weak yen is a real headache for foreign workers because the income they earn in Japan is reduced when converted to their home currency. Japan’s attractiveness as a place to work has been declining rapidly due to the weak yen. The weak yen is having a serious negative impact on the labor market. The technical internship system, with its strict regulations, will no longer be able to secure an adequate labor force. A fundamental review of policies may be needed, including consideration of a system to accept foreigners as official workers. And prices: The corporate goods price index rose 9.5% y/y in March, the highest growth rate since December 1980, when the effects of the second oil crisis were still felt. Prices rose for 526 out of 744 items, accounting for 70% of the total, and it is said that a 2% CPI (consumer price index) increase may be possible. Since the growth rate of salaries is not linked to the growth rate of prices, there is a possibility of stagflation (a phenomenon in which inflation simultaneously occurs in the midst of an economic recession) in the future. The “real effective exchange rate” announced by the Bank for International Settlements, which indicates the overall strength of the yen, is at its lowest level in about 50 years. In other words, the Japanese yen is only as strong as it was in the early 1970s. If the yen were to plunge to 150 yen to the dollar, this would mean that our lives would be reduced to below the level of the early 1970s. At that time, only a handful of people, including top professional baseball players and entertainers, were able to travel abroad. Now they may think they just can’t go abroad because of the Covid-19, but even if the pandemic dawned, the general public would still be unable to go abroad because prices are too high. Even if they did go, for example, a Big Mac from McDonald’s in the U.S. costs $5.81, but converted to yen at 150 yen to the dollar, the price is 871.5 yen. The price in Japan is 390 yen, which is about 2.2 times the price in Japan, simply calculated. This is a miserable time when one cannot even casually eat fast food overseas.
5. Review of Monetary Policy
To avoid such a situation, the Japanese government should intervene aggressively in foreign exchange markets. At its monetary policy meeting at the end of April, the BOJ reiterated its stance of holding down the rise in long-term interest rates, but is this really the right course of action? With only Japan continuing to pursue its own monetary policy, no amount of foreign exchange intervention will have a limited effect. What is needed now is a review of monetary policy, coordination with foreign countries, and policies to prevent further depreciation of the yen.