“Japanese Minister of Finance Satsuki Katayama and South Korean Minister of Economy and Finance Koo Yun-cheol expressed serious concern over the sharp depreciation of the Korean won and the Japanese yen. Furthermore, they reaffirmed that they will closely monitor foreign exchange markets and continue to take appropriate actions against excessive volatility and disorderly movements in exchange rates,” said a media note after the officials met in Tokyo.

The yen touched its lowest in 20 months on 13th March, nearing the line of 160.00 to the dollar that the market analysts think might prompt Tokyo to intervene to support the currency. ‌The ⁠won, on the other hand, breached a psychological barrier of 1,500 per dollar this month for the first time since March 2009.

The Iran war has also driven ⁠the dollar higher on safe-haven demand, apart from battering the currencies of countries heavily reliant on imported oil.

The currency is also gaining as traders reduce expectations for how much the US Federal Reserve might cut borrowing costs in 2026, as worries over rising inflation have reduced the likelihood of interest rate cuts from two before the war to none now.

Tokyo and Seoul shared the view that significant volatility had emerged in financial markets, including foreign exchange, Satsuki Katayama told a press conference after the meeting.

“The Japanese government ⁠is fully prepared to respond at any time, bearing in mind the impact that currency moves may have on people’s livelihoods amid surging oil prices, and I believe both ⁠sides share that understanding,” she added.

Yen, due to its huge trade surplus and enormous net international investment positions, was once used to enjoy unconditional safe-haven status.

However, that position is under threat now, as Joey Chew, head of Asia FX research at HSBC, told Reuters, “The yen can be vulnerable to potential oil supply shocks – it also weakened last year in mid-June amid Israel-Iran tensions.”

The post Japan, South Korea share volatile currency concerns as Yen faces stern test appeared first on International Finance.

Now, talking about the yen, the Japanese currency has lost about a third of its value since the end of 2019, driven mainly by the wide gap in interest rates between Japan and the United States. There are reports about a weak yen cutting into Japanese travellers’ ability to spend abroad, as rising overseas prices and lower interest in international travel among younger generations appeared to be factors behind declining passport ownership in the Asian country, preventing a full rebound from pandemic-era lows.

Talking about the yen, the Japanese currency is the world’s third most traded one, accounting for 13% of global foreign exchange transactions in 2022.

“From March to August 2024, the yen experienced a rollercoaster of fluctuations, reflecting the high sensitivity of currency markets to both domestic policy changes and global geopolitical events. Key drivers included Japan’s shift away from its negative interest rate policy, interest rate hikes, and uncertainties surrounding a potential US recession. These fluctuations represent a new normal for the yen and explore its potential implications for the economic and geopolitical landscape in the Indo-Pacific region,” stated Dr Seohee Park, a postdoctoral research fellow at the Department of International Politics and Economy, Graduate School of International Cultural Studies, Tohoku University.

A turbulent 2024

Yen’s recent movements have been heavily influenced by geopolitical events like the Russia-Ukraine war and tensions in the Asia-Pacific region. The core of the yen’s recent volatility is the Bank of Japan’s (BOJ) monetary policy. In March 2024, the USD/JPY exchange rate ranged from a low of 146.92 to a high of 151.61, reflecting the yen’s depreciation.

Such a weak yen prompted the BOJ, under the leadership of Kazuo Ueda, to intervene in April to stabilise the currency. The central bank ended its negative interest rate policy that had lasted for eight years and increased interest rates for the first time in 17 years.

Despite these policy changes, the yen continued to weaken, reaching its lowest point on 9th July (161.60 yen to $1) since June 1986. Thus, the BOJ underwent another intervention on 11th July, spending up to 3.57 trillion yen ($30.11 billion) in the foreign exchange market to lift the yen from its 38-year low.

“The exchange rate peaked at around 161.90 in July, just before the yen appreciated significantly by over 12% following the central bank’s rate hike.

Throughout July to August, the yen moved from 161.99 on 3rd July to 141.66 by 5th August. This appreciation was partly due to the BOJ’s decision to raise interest rates to 0.25% and reduce bond purchases, which strengthened the yen against the dollar. However, the yen’s rapid appreciation on 5th August triggered a massive sell-off in the Japanese stock market, with the Nikkei Stock Average plummeting 4,451.25 points, or 12%, its worst-ever daily decline,” said Dr Park.

The above-mentioned sell-off was driven by concerns over a potential US recession and the yen’s strength, which could negatively impact Japanese exporters. Surprisingly, the market rebounded sharply, surging 3,217.46 points, or 10.2%. The rebound was attributed to strong US service sector data for July, which eased concerns about a recession and led to a correction in the dollar-yen rate.

In August, the yen’s value again fluctuated between 143.89 and 149.34, with an average rate of 146.63. This volatility occurred due to the interest rate disparity between Washington and Tokyo, as well as market reactions to a potential US economic downturn.

While the BOJ has been committed to yield curve control and ensuring ultra-low interest rates, these policy stances have played a central role in guiding the yen’s value. However, these accommodative approaches have also fuelled concerns about inflationary pressure, which has permeated Japan’s domestic economy and is evident in the recent surge in consumer prices, driven in part by rising food and energy costs.

While throughout 2024, the BOJ maintained its position that inflation was largely transitory, consumer confidence eroded too, as the ratio fell 0.27% from 2023, leading to a wage-price spiral. The BOJ faced a difficult balancing act: stimulating economic growth while keeping inflation under control.

Yen’s depreciation significantly impacted Japan’s export-oriented industries, particularly in the technology and automotive sectors. In May 2024, exports increased 11.9% compared with the same period in 2023, the highest growth rate since November 2022. The trend was also evident in the mid-August Nikkei rally, where major exporters such as Tokyo Electron, Sony, and Toyota led the gains.

The Nikkei Stock Average surged 3.5% on 13th August, boosted by a weaker yen after the Bon holiday. Still, a boost in exports was checkmated by shrinking sales figures, as global demand remained relatively soft.

“While the weaker yen has boosted Japan’s export-oriented industries, it is crucial to recognise the double-edged nature of this currency depreciation. Many Japanese small and medium-sized enterprises, especially in manufacturing with high dependence on imported energy and raw materials, are facing significant challenges due to increased import costs. This internal economic strain highlights the mixed effects of the currency’s fluctuations. The benefits of a weak yen are not well distributed across the Japanese economy and may come at a considerable cost to certain sectors,” Dr Park noted.

Listed companies’ financial statements for the fiscal year 2023–24 also showed them registering record-high profits due to the weak yen. However, the depreciation also led to a rise in prices for imported goods, amid tepid personal consumption.

Teikoku Databank conducted a survey looking at the impact of the weak yen on 1,046 companies from May 10 through 15, revealing that 16.0% had seen a “positive effect” on sales, 35.0% had experienced a “negative effect,” and 49.0% reported “no change.” In contrast, for profits, there had been a “positive effect” for 7.7%, a “negative effect” for 63.9%, and “no change” for 28.5%, meaning profits at two out of three companies were negatively impacted. Further, 31.7% saw negative effects on both sales and profits.

Even though it was impossible to avoid increases in raw material prices due to the weak yen, it became difficult for each company to reflect those increases in their products and services. Now the question is: why was the currency even falling?

The currency has been losing more than a third of its value since the beginning of 2021. Investors were selling the currency, and exporters were not feeling the need to convert foreign proceeds into yen, further decreasing the currency’s demand.

While the BOJ’s preference for keeping interest rates extraordinarily low to encourage more inflation in its economy (as well as to boost bank lending and spur demand) has been an open secret, in February 2024, widespread labour shortages and a weakening yen resulted in Japan being overtaken by Germany as the world’s third-biggest economy, as the Asian country slipped into recession.

The BOJ had to end its policy of keeping its benchmark interest rate below zero, lifting its short-term policy rate from -0.1% to between zero and 0.1%.
After that decision, markets were focused on the pace of further rate rises. Then the BOJ announced in April that it would hold interest rates steady, which resulted in another round of yen sell-offs, putting more pressure on the currency, as it went down to 160 against the dollar for the first time since 1990.

Yen’s warrior-like legacy

“The currency was born back in 1872, when Japan was brimming with optimism after the Meiji Restoration, abandoning centuries of isolation and encouraging modernisation. It was a currency that symbolised the identity of a newly self-confident nation embracing the wider world. Originally bound to the gold standard, it underwent major changes after 1945. With the world in chaos, the 1949 Bretton Woods system provided a lifeline for shattered economies desperate for stability. Under this new regime, the yen was fixed at 360 yen to the dollar, offering Japan security even if it constrained flexibility. In retrospect, this balancing act reflected the nation’s resilience,” Dr Park said.

By the early 1970s, “Bretton Woods” collapsed as the United States abandoned the gold standard, and Japan let the yen float freely in 1973. The resulting combination of uncertainty and potential generated substantial movements in its value. While the 1985 Plaza Accord intended to weaken the dollar, this triggered a chain reaction that severely affected the yen.

Trade tensions with Washington saw the currency’s value tumble to a low of 79.75 against the dollar by 1995. In response, Japan’s Ministry of Finance soon began directly buying and selling yen to stabilise its value and protect exporters from economic downturns.

Even though the yen going down to 160 against the dollar for the first time since 1990 should have created a panic-like situation in Japan, the currency, for a good part of its existence, has been operating amid headwinds like global financial crises and shifts in monetary policy.

As the Japanese proverb ‘fall seven times, stand up eight’ implies, responding with resilience is what counts for a currency.

“Over the years, the yen has exemplified this resilience, especially in uncertain times. From the fallout of the 2008 financial crisis, when it surged to around 90.87 against the dollar as investors ran for safety, to its role as a haven during the COVID-19 pandemic, the yen has proved itself. However, its apparent stability remains vulnerable to external pressures, particularly when other nations grapple with inflation: the 2022 uplift in US interest rates battered the yen and widened the yield gap between Japanese and US government bonds. This growing divergence in monetary policies has made the yen more volatile and more subject to investor sentiment,” noted Dr Park.

In September 2024, inflation in Tokyo met the BOJ’s 2% target, signalling a return to growth and the promise of further interest rate hikes. However, the yen was trading at about 147.83 to the dollar, the weakest rate in decades, as the country was dealing with geopolitical tensions, especially in the Asia-Pacific region, supply chain problems, and the decision to keep interest rates near zero, all contributing factors.

In 2024, Dr Park said, “Speculation about changes in Japan’s monetary policy suggests that the yen might bounce back, but with inflation creeping upwards and mounting global uncertainty, the situation is more precarious for consumers and policymakers alike, leaving the currency exposed. The defining moment came in July 2024 when the BoJ raised its short-term policy range from 0% to a tentative 0.1%. While a stronger yen may temper inflation, it may also dampen Japan’s export-driven economy.”

According to the “Economic Complexity Index,” Japan has remained the world’s most complex economy, due to its sophisticated infrastructure, diverse export base, advanced industrial sector, and leadership in technologies like electronics, robotics, and automotive manufacturing. Nevertheless, Japan’s low interest rates, domestic inflation challenges, and total reliance on energy imports in a highly volatile global energy market all continue to influence the yen’s value.

The widening gap between Japanese rates and those of other major economies prompted the yen’s slide to a 24-year low: 132 against the dollar. JP Morgan, while analysing the massive USD/JPY differential, stated that the yen is influenced by market expectations of US Federal Reserve policy rather than by the actions of the BOJ.

“While BoJ interventions could create short-term risks, they are unlikely to affect the main factors driving the yen’s depreciation. Despite the bank’s recent departure from negative interest rates, the yen remains tied to the US economy, as shown by a strong rally after a US CPI report in March 2024,” Dr Park remarked.

What awaits the Yen in 2025?

In January 2025, the BOJ increased the key benchmark interest rates by a 25-basis-point rise to 0.5%. While the decision indicates that the Japanese economy is developing as expected after the high inflation reading, this rate hike fuelled the yen to trade higher against the dollar.

On February 24, the yen rose in Asian trade, on track for the fourth straight profit against the dollar, hitting a 12-week high on strong investment demand. The central bank’s Vice-Governor Riyuzu Himuno said the path of monetary policies will depend on data, especially wage growth in both 2024 and 2025.

As per the recent data, Japan’s GDP growth accelerated in Q4, in turn raising pressures on BOJ policymakers. The odds of a BOJ March 2025 interest rate hike rose by 0.25% to 80%. The currency, meanwhile, has strengthened to around a two-month high against the dollar in the 149 zone.

Investors, in February 2025, snapped up the yen, pushing it to 149.95, as stronger-than-expected GDP data fuelled speculation of further BOJ tightening, lifting Japan’s benchmark 10-year government bond yield to a fresh 15-year high.

In the opinion of Sayuri Shirai, a former member of the central bank’s board, the BOJ could increase interest rates in March if US President Donald Trump implements his proposed tariffs, intensifying domestic inflation.

“At the start of February, new tariffs on imports from Canada and Mexico were delayed for a month. However, a 10% tariff on all Chinese imports has been implemented. These tariffs could escalate global inflation,” Shirai noted.

Shirai indicated that the BOJ is likely monitoring the tariff situation closely. March could be an appropriate time to increase rates, given the current high domestic inflation. Despite the broader Japanese economy’s weakness, Shirai told investing.com that the central bank must continue to raise interest rates to counter the weak yen and to combat rising costs of food and energy.

Shirai concluded by stating that Japan is experiencing cost-push inflation largely due to the weak yen. If this weak yen is exacerbating inflation and causing significant issues for Japan’s economy, the BOJ should acknowledge this and continue to raise rates.

The post Why is Yen turning heads now? appeared first on International Finance.

The decision, which is the first rate increase since July of last year, was made just days after US President Donald Trump took office.

Donald Trump is expected to keep international policymakers on guard against the possible fallout from threatened higher tariffs.

Bank of Japan Governor Kazuo Ueda stated at a press conference that the weakening yen was still driving up import prices while wage increases were becoming more widespread and integrated across businesses.

He stated, “We have not presented an idea,” regarding when the next rate hike will occur.

The BOJ will decide at each meeting based on the data available at the time.

At its two-day meeting that ended, the Bank of Japan increased its short-term policy rate from 0.25% to 0.5%. This is the highest level Japan has seen in 17 years. Toyoaki Nakamura, a board member, dissented from the vote, which went 8-1.

The widely anticipated action demonstrates the central bank’s determination to gradually raise interest rates to about 1%, which analysts believe will neither cool nor overheat Japan’s economy.

Additionally, it represents another step Japan is taking to overcome the decades-long deflation and slow economic growth that plagued the nation.

“The likelihood of achieving the BOJ’s outlook has been rising,” with many firms saying they will continue to raise wages steadily in this year’s annual wage negotiations, the central bank said in a statement announcing the decision.

“Underlying inflation is heightening towards the BOJ’s 2% target,” Bank of Japan added further, noting that financial markets remain stable as a whole.

The BOJ stated that it would keep raising interest rates if its price and economic projections came to pass, but it made no changes to its guidance on future policy.

However, it eliminated a sentence that emphasised the necessity of carefully examining the risks associated with foreign markets and economies, reaffirming its belief that strong US growth will support Japan’s economy—at least for the time being.

The post Bank of Japan raises interest rates to highest in 17 years, yen jumps appeared first on International Finance.

According to Minister of Economy, Trade and Industry Ken Saito, the government will provide up to 350 billion yen (USD 2.44 billion) for 12 projects involving storage batteries or related parts, materials, or production equipment.

“We hope that these efforts will strengthen Japan’s storage battery supply chain and the storage battery industry’s competitiveness,” Saito said, as reported by Reuters.

According to reports from Japanese media, the action will help increase the nation’s yearly production capacity for storage batteries by about 50% to 120 gigawatt-hours (GWh), from 80 GWh at the moment.

“The government backing included support for investments by Toyota, Nissan Motor, and joint projects that Panasonic Holdings’ energy unit would run with automakers Subaru and Mazda Motor, respectively,” Saito said.

The latest assistance follows the Fumio Kishida government’s June 2018 announcement of nearly USD 1 billion in subsidies, with the first batch to be awarded in April 2023, for the production of storage batteries.

With its battery subsidiaries Prime Planet Energy and Solutions and Primearth EV Energy, Toyota would invest a total of roughly 245 billion yen to increase solid-state and prismatic battery production capacity by 9 GWh, according to the industry ministry. Toyota is also opening a new EV battery plant to supply upcoming Lexus EVs, which are slated to open by 2029.

Toyota plans to begin battery deliveries in November 2026. The Yomiuri newspaper reports that the plan calls for the construction of battery plants in the prefectures of Hyogo and Fukuoka.

Toyota acknowledged in a statement that the ministry had approved the plans for the development and manufacturing of its solid-state and next-generation batteries. Still, it did not provide details about the new plants or the amount of money it would be investing.

Nissan announced in a statement that the government had certified its plan to manufacture lithium-iron-phosphate batteries. The carmaker planned to incorporate these batteries into small cars starting in the 2028 fiscal year.

It stated that it would receive up to 55.05 billion yen in support for achieving its domestic production capacity of 5 GWh annually.

Japan’s Panasonic will build EV battery parts for Subaru and Mazda as it teams up with them to boost domestic production. It’s expected to invest around USD 3.8 billion (550 billion yen).

Meanwhile, as per another report from Electrek, Toyota and Nissan will lead the efforts of the Japanese automobile industry that will invest USD 7 billion (1 trillion yen) to boost the nation’s EV battery output. The Japanese government will help as it aims to establish a domestic supply chain while moving away from China and South Korea, which currently dominate the market.

Japan has been seen as one of the biggest laggards as the industry shifts to all-electric. Sales of domestic EVs fell 39% in the first half of the year.

According to the Japan Light Motor Vehicle and Motorcycle Association, domestic passenger EV sales totalled 29,282 through June 2024, down 39% from 2023. Electric vehicle share of passenger vehicle sales slipped 0.7% from the first half of 2023 to 1.6%.

As per a spokesperson of the Japan Automobile Importers Association (JAIA), foreign brands are taking Japan’s EV market by storm. China’s BYD, for example, is offering a “wider variety of models than domestic manufacturers.

BYD’s passenger car imports surged 184% in the first half of 2024. Although only 980 BYD models were imported, BYD is gaining a foothold as new models hit the market.

After launching its first EV, the Atto 3, in Japan in January 2024, BYD has introduced other top-selling models, including the Dolphin and, most recently, the Seal. BYD launched the Seal EV in Japan in June, with starting prices around USD 33,100 (5.28 million yen).

In fact, BYD can now launch low-cost EVs as it controls nearly its entire supply chain. The Chinese automaker, often touted as Tesla’s rival, has emerged as the second largest EV battery maker globally, behind CATL.

As Japan looks to secure an EV battery supply chain, domestic companies, including Toyota and Nissan, are investing heavily.

The post Through USD 2.4 billion package, Japan eyes breaking China’s EV battery monopoly appeared first on International Finance.

The euro was steady at USD 1.3007, not far from the one-year high it had made in overnight trade, while the sterling was close to the four-month peak it had reached overnight.

The yen made significant gains and continued to rise by 0.5% to reach 155 points per dollar. Data from the Bank of Japan’s money market indicated that authorities might have purchased almost 6 trillion yen.

Dealers noted that these actions had the appearance of additional intervention, or at the very least, of markets being alarmed by the possibility.

“Many traders and Japanese investors, after the intervention, were looking to reload on their trades. The big move would have caught them offside and triggered a little bit of a reassessment if not an unwinding of those positions. Net yen shorts stood near a 17-year high last week,” National Australia Bank strategist Rodrigo Catril in Sydney said.

The large interest rate differential that had enticed investors to take on sizable short positions in the yen is closing as interest rate markets price in more than 60 basis points of United States interest rate cuts in 2024 and about 20 basis points of hikes in Japan.

Catril and other analysts also noted that statements made by United States presidential candidate Donald Trump, who in an interview with Bloomberg Businessweek described the strength of the dollar and the weakness of the yen and yuan as a big problem, were causing trepidation in the markets.

The yen has lost over 9% versus the dollar so far this year, making it the worst-performing G10 currency, while the yuan has lost about 2.2 %. Recently, the yuan was trading at 7.2667 per dollar, which is about its 50-day moving average.

Meanwhile, Japan’s core inflation accelerated for a second straight month in June 2024, extending a more than two-year run above the central bank’s 2% target and keeping alive market expectations of a near-term interest rate hike.

However, more than three-quarters of economists polled by Reuters expected the Bank of Japan (BOJ) to hold off on raising rates this month as soft consumption weighs on a fragile economy.

“Demand-driven inflationary pressure remains weak. Price rises caused by higher import costs are reducing real wages and dampening consumption. There’s no change to our view that any rate hike won’t come until October at the earliest,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The core consumer price index (CPI), which strips away the effect of volatile fresh food prices, rose 2.6% in June from 2023, slightly below market forecasts for a 2.7% gain. It followed a 2.5% gain in May and exceeded the BOJ’s target for the 27th straight month, due partly to a 7.7% jump in energy costs reflecting a reduction in utility subsidies.

“A separate index that excludes the effects of fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, rose 2.2% in June after a 2.1% reading in May. The data will be among the factors the BOJ will scrutinise at its policy meeting on July 30-31, when the board will release fresh quarterly forecasts and debate whether to raise rates from current near-zero levels,” reported Reuters.

At the policy meeting, the BOJ will likely project inflation to stay around its 2% target in the coming years, signalling its readiness to push up borrowing costs.

The BOJ exited negative rates and bond yield control in March 2024, a landmark shift away from a decade-long radical stimulus programme. Governor Kazuo Ueda has dropped hints the central bank will push up rates further if rising wages and services prices heighten prospects for durably achieving its 2% inflation target.

Some analysts feel that conditions for a rate hike are already falling into place. The latest data showing service inflation perking up to 1.7% in June from 1.6% in May indicates the sign of companies continuing to pass on rising labour costs through price hikes.

“Looking ahead, we expect underlying inflation to remain around 2% until early 2025, which we think will prompt the Bank of Japan to hike rates both this month and in October,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

A weak yen complicates the BOJ’s policy path. While it pushes import prices and broader inflation, the currency’s fall has hurt households by making food and fuel more expensive. Some members of a top economic council have warned that the government should not overlook the pain a weak yen and rising prices were inflicting on households.

“There are limits to how much companies can hike prices if consumers can’t keep up. The key is whether wage hikes and tax cuts would help lift currently weak consumption,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

The post Yen spikes as spectre of Japan government intervention spooks investors appeared first on International Finance.

Ryozo Himino also added that it was inappropriate for central banks to directly target exchange rates in setting monetary policy, as other factors need to be considered as well.

“Exchange-rate fluctuations affect economic activity in various ways. It also affects inflation in a broad-based and sustained way, beyond the direct impact on import prices,” Ryozo Himino remarked.

“That’s why we obviously need to be very vigilant to, and analyse very closely, the impact of exchange-rate volatility on the economy, prices and their outlook,” remarked the BOJ Deputy Governor, during a panel session hosted by Columbia University in Tokyo.

“The BOJ shouldn’t automatically respond to exchange-rate moves in setting interest rates, though, as there were other aspects that need to be taken into account such as the economic and price outlook,” he added further.

Ryozo Himino’s comments came amid the backdrop of a weak Yen that has become a headache for Prime Minister Fumio Kishida’s administration, which has seen its approval ratings slump as the currency’s decline pushed up households’ cost of living by inflating the import cost of food and fuel.

BOJ Governor Kazuo Ueda has ruled out using monetary policy to directly influence exchange-rate moves, but signalled the chance of tightening the monetary policy if the weak Yen pushes up inflation more than expected. The Governor also noted recently that his country has “made progress in moving away from zero and lifting inflation expectations.”

“While many of the challenges we face are similar to those encountered by our counterparts, some are uniquely difficult for us,” the BOJ chief remarked, while also noting that estimating the neutral interest rate accurately is particularly challenging in Japan, given the prolonged period of near-zero short-term interest rates over the past three decades.

In fact, while talking about the task of achieving the 2% inflation target in a sustainable and stable manner, the BOJ Governor also said that the central bank “will proceed cautiously, as do other central banks with inflation-targeting frameworks.”

Many market players expect the BOJ to raise interest rates from current near-zero levels in 2024 with some expecting a move as early as July, partly to slow the yen’s persistent decline.

Asked what the central bank would do with its huge balance sheet, Ryozo Himino said the BOJ would make a decision focusing on how it would affect the economy, prices and its goal of sustainably achieving its 2% inflation target.

“It’s desirable for markets to set long-term interest rates. On the other hand, the BOJ has been deeply involved in the bond market up till very recently and our presence remains very large. We need to avoid causing discontinuity or any unintended moves in the market,” Ryozo Himino remarked further.

Ryozo Himino’s remarks further underscore the tricky balancing act the BOJ faces in allowing market forces to drive long-term interest rates higher, while avoiding an abrupt spike in bond yields.

In March 2024, the BOJ ended eight years of negative interest rates and a policy capping long-term borrowing costs around zero dubbed yield curve control (YCC).

“The decision was partly aimed at breathing life back to a market made dormant by the BOJ’s huge presence, and allowing market forces to drive yield moves. Markets are focusing on whether the BOJ, at its next policy meeting on June 13-14, will move to a full-fledged reduction in its huge bond purchases,” reported Reuters.

The 10-year government bond yield briefly jumped to 1.1% in May 2024, the highest level since July 2011, on growing expectations of a near-term interest rate hike.

Shinichi Uchida, another Deputy Governor of BOJ, recently said that the end of Japan’s battle against persistent deflation is in sight, but acknowledged that anchoring inflation expectations to the 2% target is “a big challenge.”

“Labour market conditions have changed structurally and irreversibly, helping resolve the original causes of deflation such as excess labour supply,” the senior official told the media.

“We returned to a conventional monetary policy framework, aiming at a 2% price stability target through adjustments of the short-term policy rate, which means we have overcome the zero lower bound,” he concluded.

The post Here is what BOJ has to say on Yen’s impact on Japan economy appeared first on International Finance.

Currency impacts

Exchange rates are often ignored by the public because they are rarely necessary. An average person uses the local currency to conduct his/her daily business. Only in the case of infrequent transactions like international travel, import payments, or foreign remittances, exchange rates become a concern. A strong national currency would appeal to foreign visitors because it would make trips to the country more affordable.

However, there is a drawback, as over time, a strong currency can significantly hinder the economy by making entire industries uncompetitive and resulting in the loss of thousands of jobs. Although some people might favour a strong currency, there are more economic advantages to a weak currency.

One of the most important factors that central banks take into account, when determining monetary policy, is the value of the home currency on the foreign exchange market. Currency fluctuations can affect several things, including your mortgage interest rate, investment portfolio returns, the cost of groceries at your neighbourhood supermarket, and even your chances of landing a job.

The economy is directly affected by the level of a currency in many manners. Take merchandise trade for example. This represents the imports and exports of a country. A weaker currency generally raises the cost of imports while lowering the cost of exports for buyers abroad.

Over time, a country’s trade surplus or deficit may be attributed to its currency, which may be strong or weak. Say, for instance, that you are an American exporter who offers widgets to a customer in Europe for $10 apiece. The exchange rate is $1.25 for every €1. Thus, each widget will cost €8 to your European buyer.

Let us now assume a weakening of the Dollar and an exchange rate of €1=$1.35. You can afford to give your buyer a break and still make at least $10 per widget, but they want to bargain for a lower price. Your price in Dollars is $10.13 at the current exchange rate, even if you set the new price at €7.50 per widget, which is a 6.25% discount from your buyer’s perspective. A feeble Dollar makes it possible for your export company to compete in global markets.

On the other hand, if imports become more affordable and exports become less competitive, the trade deficit may increase and the currency may eventually weaken as a result of a self-adjusting mechanism. However, an overly strong currency can harm export-dependent industries before this occurs.

Another case study is the capital flows. Strong governments, robust economies, and stable currencies are typically associated with a flow of foreign capital into those nations. For a country to draw in money from international investors, its currency must be reasonably stable.

In the absence of such, foreign investors may be discouraged by the possibility of suffering exchange-rate losses due to currency devaluation. Foreign direct investment (FDI) refers to the process by which foreign investors build new facilities or acquire stakes in companies already operating in the recipient market.

On the other hand, foreign portfolio investment involves the buying, selling, and trading of securities in the recipient market by foreign investors. For developing nations like China and India, FDI is a vital source of funding. Foreign portfolio investments are hot money that can flee the country quickly in hard times, so governments typically prefer foreign direct investment (FDI) over them. Any unfavourable event, like currency devaluation, can cause this capital flight.

Also, significant importers may experience “imported” inflation as a result of a depreciating currency. Imports could cost 25% more in the event of an abrupt 20% decline in the value of the home currency because a 20% decline implies a 25% increase is required to return to the initial price point.

How about interest rates?

Another way the economy is directly affected by the level of a currency is interest rates. As was previously mentioned, when most central banks set monetary policy, exchange rates are a major factor. When determining monetary policy, the Bank of Canada considers the Canadian Dollar’s ongoing strength, according to Governor Mark Carney’s statement from September 2012.

Carney claimed that one factor contributing to his nation’s “exceptionally accommodative” monetary policy for so long was the strength of the Canadian Dollar. A strong home currency has a similar effect on the economy as how a tighter monetary policy does.

Furthermore, if monetary policy is tightened further during a period when the domestic currency is already strong, this could make matters worse by drawing in hot money from overseas investors looking for higher-yielding investments, which would strengthen the domestic currency even more.

Judging the global impact

With over $5 trillion traded every day, far more than all global equities, the forex market is the most actively traded in the world. Even with these massive trading volumes, currencies are typically not featured on the front pages. On the other hand, there are instances when sharp fluctuations in currency values have global effects.

One notable instance of the chaos sparked by unfavourable currency fluctuations is the ‘Asian Financial Crisis’ that commenced in the summer of 1997 due to the devaluation of the Thai baht. This devaluation followed a targeted speculative onslaught on the baht, ultimately compelling Thailand’s central bank to relinquish its fixed exchange rate with the US Dollar and allow the currency to float freely.

The adverse effects of this currency crisis then radiated to neighbouring countries including Indonesia, Malaysia, and South Korea, resulting in a substantial economic downturn characterised by a surge in bankruptcies and a sharp decline in stock markets.

The other one is China’s undervalued Yuan. China maintained the renminbi at roughly 8.2 to the Dollar between 1995 and 2005, allowing its export-led economic boom to capitalise on what its trading partners claimed was an artificially devalued and suppressed currency. China reacted in 2005 to the mounting chorus of grievances from the United States and other countries. As a result, the value of the yuan increased gradually, reaching roughly 6 RMB for every Dollar by 2013 from over 8.2 RMB in 2013.

Similarly, the Japanese Yen’s Gyrations is one such incident. From 2008 to 2013, the Japanese Yen was among the most volatile currencies. Due to Japan’s policy of nearly zero interest rates, traders preferred the Yen in carry trades, where they borrowed money for very little and used it to invest in foreign assets with higher yields.

However, as the global credit crisis deepened in 2008, terrified investors rushed to buy Yen to pay back loans denominated in the currency, which caused the Yen to appreciate sharply. The outcome was a more than 25% increase in the value of the Yen relative to the United States in the five months leading up to January 2009. Then, in 2013, Prime Minister Shinzo Abe unveiled plans for fiscal and monetary stimulus (dubbed “Abenomics”), which caused the Yen to fall by 16% in the first five months of the year.

Also, the Euro fell 20% from 1.51 to the Dollar in December 2009 to roughly 1.19 in June 2010, owing to fears that the heavily indebted countries of Greece, Portugal, Spain, and Italy would be forced out of the European Union. Over the following year, the Euro gained strength once again, but only momentarily. The Euro fell 19% between May 2011 and July 2012 as a result of renewed concerns about an EU breakup.

How can an investor benefit?

There are some ideas for profiting from currency changes. The first way is to invest overseas. Foreign exchange gains will increase your returns if you are an American investor who feels that the American Dollar is losing strength and you want to invest in robust foreign markets.

Examine the S&P/TSX Composite Index for Canada from 2000 to 2010. While the S&P 500 Index was essentially unchanged during this time, the Canadian Dollar saw returns on the TSX of roughly 72%. For American investors buying Canadian equities with greenbacks, US Dollar returns were about 137%, or 9% per annum, due to the steep appreciation of the Canadian Dollar.

The other ideas are to invest in US multinationals, refrain from borrowing in low-interest foreign currencies, and hedge currency risk. A sizable portion of the revenues and profits of the numerous large multinational corporations based in the United States come from overseas. The depreciating Dollar helps American multinational corporations’ earnings, and when the Dollar depreciates, stock prices should rise accordingly.

Since 2000, the United States has experienced record-low interest rates, so, indeed, this hasn’t been a major concern. However, the rates have risen since 2022, as the world’s largest economy, along with a huge part of the world, faced record inflation.

When such a situation, like the above one, occurs, investors should keep in mind those who had to rush to return borrowed Yen in 2008 when they were tempted to borrow in foreign currencies at lower interest rates. The lesson learnt from this tale is to never borrow money in a foreign currency if you cannot or will not be able to manage the exchange risk and it is likely to be appreciated.

Unfavourable currency fluctuations can have a big effect on your finances, particularly if you’re heavily exposed to foreign exchange. However, there are many options available to mitigate currency risk, including exchange-traded funds like the Invesco Euro CurrencyShares Japanese Yen Trust (FXY) and Euro Trust (FXE), as well as currency futures, forwards, and options. If you prefer to sleep at night, consider these.

Changes in currency can have a broad effect on both the domestic and international economies. Investors can profit from weakening US Dollars by making foreign investments or purchasing shares in US multinational corporations.

When one has a significant amount of exposure to foreign exchange, currency movements can be a powerful risk, so it might be best to use one of the many hedging tools available to reduce this risk.

The post Understanding currency fluctuations appeared first on International Finance.

The warning by Masato Kanda, Japan’s vice finance minister for international affairs, now reflects Tokyo’s desire to prevent further falls in the yen that has the potential to hurt households and domestic retailers by boosting the cost of importing raw materials.

“I won’t comment on recent currency moves. But it’s desirable for exchange rates to move stably reflecting fundamentals. We’re watching currency moves with a strong sense of urgency, and ready to respond appropriately if we see excessively volatile moves,” Kanda told reporters on the sidelines of the G20 finance leaders’ meeting in Sao Paulo.

The yen has been the worst-performing major currency in 2024 as funds and others have traded on the huge United States-Japan interest rate and bond yield gap, with the sections of the market even betting that the trend will persist further.

The yen has shed 6% of its value against the dollar so far in 2024, falling below 150.00 per dollar to within sight of its post-1990 lows around 152.00 per dollar.

Kanda, who is attending the G20 meeting on behalf of Japan Finance Minister Shunichi Suzuki, told the media about him calling on policymakers to be mindful of the risk that volatility may heighten in financial markets, including for exchange rates.

“I told the meeting that excess volatility in the currency market was undesirable, and that it was important to maintain the G20 commitment on exchange rates,” the official stated further.

“The G20 and the smaller G7 group of advanced nations share a common understanding that stable currency moves are desirable, and that countries have authority to take action in the market when exchange-rate moves become too volatile,” stated a Reuters report on the matter.

Japan intervened in the currency market three times in 2022 when the yen plunged to 32-year lows (it neared 152 yen to the dollar). The nation conducted moves like rare dollar-selling, yen-buying, which were seen by the analysts as “state intervention.”

Since then, traders have been practicing caution for any sign of further intervention as the yen continues to flirt at the 150-level.

“Japanese authorities have repeatedly said they were paying more attention to the speed of currency moves, rather than levels, in deciding whether and when to intervene. The yen’s recent declines have been driven in part by heightening market expectations that the Bank of Japan will keep interest rates ultra-low, even after pulling short-term borrowing costs out of negative territory,” Reuters stated further.

Yen Receives BoJ Boost

Bank of Japan (BoJ) board member Hajime Takata has now said that the central bank’s goal of 2% inflation is “finally in sight.” The official said that the development was “necessary to consider shifting gears from extremely powerful monetary easing,” and that the BoJ should “respond nimbly and flexibly toward an exit.” This statement immediately sent the Japanese Yen higher on the session.

Market pricing on February 29, 2024 showed a 61.5% chance of a 10 basis point rate hike at the April BoJ meeting, a 72% chance of a hike at the June meeting, and an 84% chance at the July meeting.

Despite yen picking itself up after the BoJ’s hawkish statement on inflation, the US dollar remained in a holding pattern.

Meanwhile, Japanese stocks, which have been following the pattern of a “once in a life bull run,” experienced a slight outflow of foreign capital in February 2024, after a series of robust purchases.

In the holiday-shortened week ended February 22, foreigners withdrew a net 2.83 billion yen (about USD 19 million) from Japanese stocks, marking their first weekly sale in three weeks.

“In cash equities, they ended a seven-week buying streak with withdrawals of about 78.65 billion yen on a net basis. On the contrary, they still purchased about 75.82 billion yen of derivatives contracts,” Reuters reported further.

The Nikkei share average hit a record high of 39,426.29 on February 27, surpassing the 1989 bubble-era peak. The phenomenon was driven by a tech stock rally, corporate governance reforms, and a weaker yen. Both the Nikkei and the broader Topix index continued their upward trend for the fourth consecutive week.

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Additionally, it wasn’t a true boom in many ways; rather, a post-COVID-19 spike assisted a technical boom. However, after years of stagnation, Japan’s economy is starting to gather steam. The results were also convincing enough to compel analysts to revisit their spreadsheets; private-sector expectations for growth in the March-ending fiscal year now range between 2.0 and 2.5%, virtually double earlier projections.

Since the middle of the 1990s, Japan has served as the paradigm of a struggling economy. It has been trapped in a rut, with growth often flatlining at 1.0–1.5%, weighed down by deflationary forces. While a significant portion of this was due to the drag of steadily declining asset values for the majority of the previous 30 years, it also highlighted Japan’s position as the top “mature economy,” an uncomfortable club that now includes the majority of its G-7 peers.

Since more affluent people spend a smaller percentage of their income, and the large infrastructure spending necessary to create an industrialised economy has already occurred, these economies are characterised by slower development than developing economies. This is because there is less room for future expansion. A declining population that includes fewer young people makes this worse for Japan and other nations.

Even if the Japanese economy was, in some respects, stagnant, life wasn’t all that horrible. Growth as a concept began to lose its appeal, but the government kept public infrastructure at a high standard, and businesses demonstrated their willingness to keep employees even when business was slow. In 2002, unemployment reached a high of 5.5%. As the population inevitably declines, there are currently 1.3 jobs for every job seeker, bringing the unemployment rate down to only 2.7%.

In sharp contrast to their Chinese counterparts, college graduates in Japan have no concern about getting full-time staff positions when they graduate. They do not have to deal with the uncertainties of the gig economy because they have high job security, required health insurance, and other benefits from a staff job. It may not come as a surprise that Japan isn’t innovating if the need is the mother of invention.

What is fuelling the increase in activities?

Several technical aspects of the technique used to calculate the GDP contributed in part, but some encouraging indicators for the future also played a part.

According to the most recent data, a surge in exports and a drop in imports were two of the main factors driving growth. Imports are counted as a negative within this, whereas exports are counted as a positive. According to a traditional paradigm, a country imports goods at a cost and then exports goods with a higher value, increasing the country’s wealth.

Therefore, there would typically be a timing issue between Japan’s Q2 export growth of 3.2% and Q2 import growth of 4.3%. Imports will eventually need to increase once more to replenish the merchandise that has been sold overseas. Statistics from a single quarter can be especially misleading in this situation.

But for Japan, something that doesn’t seem to be an export—the entrance of thousands of foreign tourists—plays a significant role in the export column. Foreign tourists are back with a fury, as any traveller in Tokyo’s chic enclave of Ginza can attest. Foreign visitors to Japan increased by more than 1,600% from COVID-affected levels a year earlier, amounting to roughly 2.1 million in June 2023. That is four times the amount when Japan began a significant drive to promote tourism abroad in 2012. Japan is now a bargain on the global market because of an approximately 33% decline in the yen’s value over the past ten years.

Since the figures exclude China’s August 10 decision to once again permit tour groups to visit Japan, there is still plenty of room for growth. However, a fresh row over Japan’s decision to release wastewater that was used to cool the Fukushima nuclear power plant has put that back in jeopardy. Chinese travellers made up the largest percentage of foreign tourists before the COVID-19 outbreak and were among the top spenders per person.

The decline in consumer spending, which has a significant impact on overall domestic demand, was identified by economists as a weakness. The recent (and long-needed) rise in inflation, which is currently hovering around 3%, is partly to blame for this. However, the picture is ambiguous.

Other official statistics demonstrate that during the last eight months, consumer confidence has been increasing and is currently at its highest level since December 2021. Additionally, the GDP numbers demonstrate that as employees demand higher wages, salary rises now appear to be catching up with price increases. Real salaries saw their first increase in more than two years, rising by 0.6% from the prior quarter.

Is the Japanese economy operating as usual or undergoing a fundamental transition? Economists are divided on this issue.

“The story of de-risking from China is a long-term one, but for now, we are not seeing any impact on the data, to be honest,” said Kentaro Koyama, the chief economist for Japan at Deutsche Securities.

Positively, investment is increasing due to a weaker currency, solid infrastructure, and surprisingly low labour costs that make it more alluring to both Japanese and foreign businesses. The fact that Japan is not China (which American businesses are increasingly decrying as “uninvestable”), but rather a strategically advantageous nation in East Asia with a sizable amount of government funding accessible to aid, adds to the appeal of investing there.

The restoration of Japan’s once-dominant high-tech manufacturing base is a top aim for Prime Minister Fumio Kishida as part of his “new form of capitalism.”

Government payments of 476 billion yen ($3.2 billion) to chip powerhouse Taiwan Semiconductor Manufacturing Company (TSMC) for the construction of its first Japan factory and a second facility are among the subsidies that have been provided.

Officials from TSMC claim in confidence that the Japanese factory is on schedule and within budget, in contrast to a similar facility in Arizona that is running late and over budget due to higher-than-anticipated labour costs.

More people are joining. While U.S.-based Micron Technology will invest up to 500 billion yen ($3.4 billion) in Japan over the next few years, including expansion at its Hiroshima plant, and semiconductor equipment maker Applied Materials has recently announced plans to hire over 800 new engineers for its Japan operations, Sony is currently building a new image sensor plant close to the TSMC facility.

More significantly, Japanese businesses are now focusing inward. “Japanese corporations have made relatively little capital investments in Japan over the previous 20 to 30 years, particularly in the manufacturing sector. However, the scenario has shifted amid a change in the geopolitical environment,” according to Koyama of Deutsche, who pointed out that, according to data from the Bank of Japan, big Japanese companies expect to boost their capital spending this year by 13.4%, which is more than they anticipated just three months prior.

Japanese economists concur that the rate of future wage rises, particularly those resulting from union discussions in the 2024 spring, will play a significant role in boosting future domestic demand and preventing growth from fizzling out.

“Consumers anticipate that wages will rise higher in the upcoming year,” claimed Takahide Kiuchi, a former member of the BOJ policy board who is currently working for the Nomura Research Institute in Tokyo. However, if pay growth is underwhelming in 2024, then expect a drop in consumption.

Another significant challenge for Japan is opening up a labour market that is still heavily skewed toward lifetime employment. Again, claiming that businesses won’t raise salaries for workers who aren’t at risk of leaving, the government has started yet another scheme to promote labour mobility.

Even though millennials in Japan exhibit some of the carefree attitudes observed in millennials elsewhere, it is unclear whether this new campaign will be any more successful than the long list of past projects dating back a decade. Mid-career job moves continue to be unusual as employees choose security over increased income.

China, however, presents numerous hazards to the expansion of the Japanese economy. The possible impact of China’s stalled growth on Japanese exports is the most urgent problem. Even though the government advocates for onshoring and de-risking, China continues to be Japan’s largest trading partner, receiving 20% of all exports from that country.

In the long term, geopolitics and the potential for a Taiwan war can become the main risks. This could have an impact on shipments to Taiwan, which is Japan’s fourth-largest export market, in addition to possibly harming exports to China.

The disruption to the supply chain that would result from a halt in Taiwan’s semiconductor manufacturing is an additional factor. According to Kiuchi, this alone would reduce Japan’s GDP by 3%.

There may be more to come. Given the military logistics that have brought war to Japan’s doorstep, the country will be drawn into the battle. If this happens, commerce with the rest of Asia—which accounts for 50% of all of Japan’s trade—could be in jeopardy.

According to Kiuchi, the potential harm to the Japanese economy in the event of an incident in Taiwan “could be unprecedented.”

The future, he believed, is genuinely promising if all of this can be prevented.

“Japan’s economic share has been falling for many years, but the government has adopted a high-growth policy, and that gives Japan the opportunity to improve its presence in the global economy,” the expert concluded.

While there are concerns about the sustainability of Japan’s growth story and potential risks to the island country’s economy, the government’s high-growth policy and investments in key industries are promising.

Japan’s unique position, with a highly educated workforce, advanced infrastructure, and government funding available to support businesses, makes it an attractive destination for investors.

By addressing challenges such as labour market reform and increasing domestic demand, Japan has the potential to continue its economic resurgence and play a more prominent role in the global economy.

The post Debating Japan’s brilliant rebound appeared first on International Finance.

After hitting a record low of 7.24 against the dollar early on Monday, Turkey’s lira found some support after Finance Minister Berat Albayrak stated the country’s economic action plan to ease investor concerns and the banking watchdog said it limited swap transactions.

The Financial Times reported on Friday, citing two sources, that the European Central Bank had concerns about banks in Spain, Italy and France and their exposure to Turkey.

“The exposure of European banks to Turkey seems to be not as large as people fear, so I think it’s manageable. It will not lead to a kind of banking crisis in the euro area,” stated Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

In early trade on Monday, the euro dropped as low as $1.1368– falling to its lowest level against the dollar since July last year. It last traded down 0.16 % at $1.1390 at 0040 GMT.

The common currency also slipped against the safe haven Swiss franc and yen. The euro briefly fell to a one-year low of 1.1302 francs against the Swiss franc before paring some losses. It traded at 1.1332 francs as of 0040 GMT, down about 0.2 % on the day.

The euro also dipped to a 10-week low of 125.455 Japanese yen in early trade before recovering slightly. It was last down 0.4 % at 126.00 at 0040 GMT. Turkey’s lira last traded at 6.84 against the dollar at 0040 GMT, after sinking to a record low of 7.24 in early trade on Monday.

The currency has fallen about 45 % against the greenback this year on worries over Turkish President Tayyip Erdogan’s increasing control over the economy and a worrying, widening rift with the United States.

Yamamoto said the Turkish lira may remain unstable, while he expected the euro to stabilise during the week.

“It seems that this kind of slowdown is a kind of necessary thing for the Turkish economy to reduce the current account deficit and the very high inflation,” he stated.

Meanwhile,the yen strengthened about 0.3 % against the dollar to 110.61 yen as investors continued to bid up safe-haven assets. The Japanese currency netted some gains after briefly rising to a one-month high of 110.32 yen per dollar.

The Australian dollar was also down 0.2 % at $0.72765 , close to an 18-month low of $0.72505 hit early in the session.

Elsewhere,the Mexican peso, Argentine peso and South African rand were also weak against the US dollar on Monday as the lira crisis unsettled some other emerging market currencies.

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