Yen's Value Falling Following Ukraine War
The yen-dollar exchange rate reached 120.4 yen per U.S. dollar at 16:00, March 22, the highest since Feb. 1, 2016. Since the Russian invasion of Ukraine on Feb. 24, the value of the yen has fallen 4.7 percent or so. On the other hand, a strong dollar has continued, and the yuan has moved sideways since the beginning of this year. In other words, the yen is showing signs that it is no longer a safe asset.
Former Prime Minister Shinzo Abe implemented economic policies based on a weak yen. He expected that financial easing and a weak yen would lead to an increase in exports and corporate profits to result in more investment and consumption.
However, Japan’s prolonged low interest rates backfired. Market interest rate differences increased in relation to those in the United States and so on and money continued to flow out. At present, the 10-year government bond yield is close to 0 percent in Japan and over 2 percent in the United States. The demand for the Japanese currency cannot but decrease and a decline in its value is unavoidable.
The decline is being accelerated by the weakening fundamentals of the Japanese economy. Japan recorded a current account deficit of 370.8 billion yen in December and 1.1887 trillion yen in January with international raw material prices soaring. In the event of a current account deficit, Japanese enterprises have to sell the yen and buy the U.S. dollar for payment, and then the value of the Japanese currency falls more. In addition, with an increasing number of Japanese enterprises doing business abroad, the necessity of JPY-to-USD exchange is decreasing, which means a decreasing demand for the currency.
More and more investors are becoming pessimistic about the Japanese economy and this is another reason for the decline. In today’s Japan, the working-age population is decreasing fast without structural reforms and productivity innovations to make up for it. This implies the value of the currency will continue to fall.
The Japanese government is unlikely to change its monetary policy though. The Bank of Japan remarked on March 18 that monetary easing would continue, adding, “The problem is not the weak yen but a rise in oil price and, rather, the weak yen is currently contributing to the Japanese economy.” Unlike its remarks, experts point out that Japan is in no position to raise interest rates. “Japan’s national debt-to-GDP ratio amounted to 258 percent in 2020, second only to Venezuela,” one of the said, adding, “The Japanese government’s interest burden will soar if the rate is raised.”