Why the Yen Is So Weak and What That Means for Japan: QuickTake Friday, June 10, 2022 04:10 PM By Yoshiaki Nohara
(Bloomberg) –The yen has slipped to two-decade lows against the dollar largely because Japan has a different view on inflation than its global peers. The Bank of Japan stands out among major central banks with its commitment to maintain rock-bottom interest rates to revive inflation on a sustainable basis (after years of trying to fend off deflation), even as surging prices in most of the rest of the world spur the US Federal Reserve to roll back stimulus and raise rates. A weaker yen can both benefit and harm the economy, businesses and consumers. The steepness of its slide, however, has raised questions about the BOJ’s policy and the possibility of government intervention in currency markets. 1. Why is the yen so weak? The biggest reason is the move toward higher interest rates in the US. That makes dollar-denominated assets more attractive for investors seeking higher returns. The yield on 10-year notes has climbed above 3% — the highest since 2018 — as traders continue to bet on an aggressive series of rate hikes from the Federal Reserve. Other factors include the strength of the US economy and its labor market, while Japan continues to lag behind its peers to bring its economy back to its pre-pandemic size. Japan’s trade balance staying in the red is also likely feeding into the weaker yen.
2. What does the weak yen mean for the economy? When former Prime Minister Shinzo Abe ushered in a period of a weaker yen in the last decade in part to stave off the threat of deflation (a downward spiral that can wreck economies), the business world largely applauded. A cheaper yen helps exporters including carmaking giant Toyota Motor Corp. when they repatriate profits made overseas. It also makes Japan a more affordable travel destination — outside of pandemic times — for foreigners, bringing tourist cash for the hospitality sector and regional economies. The mood is shifting now though. Costs for commodities and other goods are rising at the fastest pace in decades, squeezing profits at businesses that rely on imports, while everyone is feeling the pinch from higher energy prices. The rising cost of imported food and other daily necessities is piling on pain for consumers. While Japan is gradually reopening its borders to overseas visitors, any economic benefits from that will be limited for the time being. With the central bank unlikely to budge, Prime Minister Fumio Kishida put together a raft of relief measures including higher fuel subsidies to ease the impact for households and businesses.
3. Why doesn’t Japan raise rates? BOJ Governor Haruhiko Kuroda keeps saying it’s too early to cut back monetary easing and raise rates in Japan, where inflation remains relatively muted. In April, Japan’s benchmark inflation measure rose 2.1%, above the BOJ’s 2% target. But Kuroda insists that it’s not yet expected to stay above the goal in a stable, sustainable manner, especially without robust wage increases. By contrast, US consumer prices have been rising more than 8%. While Kuroda has continued in June to insist he won’t change course, he famously rattled markets with a surprise shift to negative interest rates in 2016, before eventually settling on the current policy, which is known as yield curve control.
4. What’s a yield curve? It’s a way to show the difference in the reward investors get for choosing to buy shorter- versus longer-term debt. Most of the time, they demand more for locking away their money for longer periods, with the greater uncertainty that brings. So yield curves usually slope upward.
Explainer: What Causes a Yield Curve to Invert and What That Means
5. What’s yield curve control? Normally market forces determine the yield curve. The BOJ takes a more hands-on approach. Through yield curve control, adopted in 2016, it aims to keep 10-year government bond yields around 0% with a quarter of a percentage point, or 25 basis points, of wiggle room either side — part of its effort to flood the economy with cheap money to revive growth. The Fed’s interest rate hikes prompted investors to speculate that Japan would follow suit, meaning it would allow the yield to go higher.
6. What’s the BOJ’s response been? After a wave of pressure pushing the yields higher, the bank doubled down on its commitment to keep a lid on them. It decided in April it would buy as many bonds as needed every business day to protect the 0.25% ceiling on 10-year debt yields. That made it clear bond yields in Japan will stay low even as they rise in the US.
7. Could the government intervene? Finance Minister Shunichi Suzuki has refrained from even mentioning the possibility of direct intervention in the currency market. If the government intervenes to strengthen the yen, it would be the first time since 1998, when it and the US joined in a massive coordinated yen-buying spree. Any one-sided moves from Japan this time would likely trigger some form of protest from the US side.
8. Where does this leave Kuroda? It’s an awkward way to spend the last year of his second five-year term as governor. But he’s maintained his stance that a weak yen is good for the economy as a whole, sticking to protecting the credibility of his policy framework. Kuroda often points out it’s the finance ministry, not the BOJ, that is in charge of foreign exchange matters. Low borrowing costs also help Kishida, the prime minister, keep increasing public spending to aid a fragile economy recovery from the pandemic. That suggests he won’t likely be pushing hard for regime change at the central bank when Kuroda’s term ends next April.
To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net Paul Geitner
Imports = food and energy
Food and energy get more expensive =Japan follows the USA into recession.
Brunette in Japan claims high school teacher yanked locks while scolding her over hair color https://mainichi.jp/english/articles/20220531/p2a/00m/0na/007000c
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Why the Yen Is So Weak and What That Means for Japan: QuickTake
Friday, June 10, 2022 04:10 PM
By Yoshiaki Nohara
(Bloomberg) –The yen has slipped to two-decade lows against the dollar largely because Japan has a different view on inflation than its global peers. The Bank of Japan stands out among major central banks with its commitment to maintain rock-bottom interest rates to revive inflation on a sustainable basis (after years of trying to fend off deflation), even as surging prices in most of the rest of the world spur the US Federal Reserve to roll back stimulus and raise rates. A weaker yen can both benefit and harm the economy, businesses and consumers. The steepness of its slide, however, has raised questions about the BOJ’s policy and the possibility of government intervention in currency markets.
1. Why is the yen so weak?
The biggest reason is the move toward higher interest rates in the US. That makes dollar-denominated assets more attractive for investors seeking higher returns. The yield on 10-year notes has climbed above 3% — the highest since 2018 — as traders continue to bet on an aggressive series of rate hikes from the Federal Reserve. Other factors include the strength of the US economy and its labor market, while Japan continues to lag behind its peers to bring its economy back to its pre-pandemic size. Japan’s trade balance staying in the red is also likely feeding into the weaker yen.
2. What does the weak yen mean for the economy?
When former Prime Minister Shinzo Abe ushered in a period of a weaker yen in the last decade in part to stave off the threat of deflation (a downward spiral that can wreck economies), the business world largely applauded. A cheaper yen helps exporters including carmaking giant Toyota Motor Corp. when they repatriate profits made overseas. It also makes Japan a more affordable travel destination — outside of pandemic times — for foreigners, bringing tourist cash for the hospitality sector and regional economies. The mood is shifting now though. Costs for commodities and other goods are rising at the fastest pace in decades, squeezing profits at businesses that rely on imports, while everyone is feeling the pinch from higher energy prices. The rising cost of imported food and other daily necessities is piling on pain for consumers. While Japan is gradually reopening its borders to overseas visitors, any economic benefits from that will be limited for the time being. With the central bank unlikely to budge, Prime Minister Fumio Kishida put together a raft of relief measures including higher fuel subsidies to ease the impact for households and businesses.
3. Why doesn’t Japan raise rates?
BOJ Governor Haruhiko Kuroda keeps saying it’s too early to cut back monetary easing and raise rates in Japan, where inflation remains relatively muted. In April, Japan’s benchmark inflation measure rose 2.1%, above the BOJ’s 2% target. But Kuroda insists that it’s not yet expected to stay above the goal in a stable, sustainable manner, especially without robust wage increases. By contrast, US consumer prices have been rising more than 8%. While Kuroda has continued in June to insist he won’t change course, he famously rattled markets with a surprise shift to negative interest rates in 2016, before eventually settling on the current policy, which is known as yield curve control.
4. What’s a yield curve?
It’s a way to show the difference in the reward investors get for choosing to buy shorter- versus longer-term debt. Most of the time, they demand more for locking away their money for longer periods, with the greater uncertainty that brings. So yield curves usually slope upward.
Explainer: What Causes a Yield Curve to Invert and What That Means
5. What’s yield curve control?
Normally market forces determine the yield curve. The BOJ takes a more hands-on approach. Through yield curve control, adopted in 2016, it aims to keep 10-year government bond yields around 0% with a quarter of a percentage point, or 25 basis points, of wiggle room either side — part of its effort to flood the economy with cheap money to revive growth. The Fed’s interest rate hikes prompted investors to speculate that Japan would follow suit, meaning it would allow the yield to go higher.
6. What’s the BOJ’s response been?
After a wave of pressure pushing the yields higher, the bank doubled down on its commitment to keep a lid on them. It decided in April it would buy as many bonds as needed every business day to protect the 0.25% ceiling on 10-year debt yields. That made it clear bond yields in Japan will stay low even as they rise in the US.
7. Could the government intervene?
Finance Minister Shunichi Suzuki has refrained from even mentioning the possibility of direct intervention in the currency market. If the government intervenes to strengthen the yen, it would be the first time since 1998, when it and the US joined in a massive coordinated yen-buying spree. Any one-sided moves from Japan this time would likely trigger some form of protest from the US side.
8. Where does this leave Kuroda?
It’s an awkward way to spend the last year of his second five-year term as governor. But he’s maintained his stance that a weak yen is good for the economy as a whole, sticking to protecting the credibility of his policy framework. Kuroda often points out it’s the finance ministry, not the BOJ, that is in charge of foreign exchange matters. Low borrowing costs also help Kishida, the prime minister, keep increasing public spending to aid a fragile economy recovery from the pandemic. That suggests he won’t likely be pushing hard for regime change at the central bank when Kuroda’s term ends next April.
To contact the reporter on this story:
Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
To contact the editors responsible for this story:
Paul Jackson at pjackson53@bloomberg.net
Paul Geitner
Imports = food and energy
Food and energy get more expensive =Japan follows the USA into recession.