Japan is OK With a Wilting Currency, For Now

The Japanese Meteorological Agency officially declared this week the start of cherry blossom season after full bloom reached Tokyo. But, amid the waves of flowering pink-and-white sakura trees, the country’s currency is doing its best imitation of a wilting office plant.

On Monday, the Japanese yen fell to a seven-year low against the US dollar. The Bank of Japan is just fine with that.

Diverging in Synthesis

The immediate cause of Japan’s falling currency is a fork in the road between central banks. The Bank of Japan has maintained ultra-low interest rates, while the US Federal Reserve has become more hawkish due to inflation. After the Fed’s recent rate hike, 10-year US Treasury bond yields are at 2.5%, literally 10 times the 0.25% yield on a Japanese government bond. Antoine Bouvet, a senior rates strategist at ING, told the Financial Times it’s a “policy divergence on steroids.” Not surprisingly, since capital flows to where it’s treated best, the divide in rates has prompted a sell-off of the yen as opportunistic investors move with the tide.

There’s a simple reason both countries, for now, are fine with the decoupling. A weak yen means the US pays less for goods from Japan, a welcome deal when 7.9% US inflation is upping the price tags on everything from Big Macs to Teslas. In return, Japanese companies get more sales and a profit boost when cash from their foreign subsidiaries is converted to yen. The BoJ is willing to intervene to keep things this way:

• On Monday, the BoJ offered to buy an unlimited number of 10-year Japanese government bonds to prevent their yield from rising. The offer will stand through Thursday.
• The yen fell as much as 2.4% to ¥125 per dollar. The BoJ estimated in January that a 10% depreciation of the yen would add 1% to Japan’s GDP, and the Daiwa Institute of Research predicts a 10 yen depreciation will add $12 billion in profits to Japanese firms.

Purchasing Powerless: “A weak yen will further increase imported goods prices, possibly squeezing people’s livelihoods in Japan,” wrote the editorial board of Mainichi Shimbun, one of Japan’s major newspapers, arguing there’s a human downside. “The yen’s real effective exchange rate, an index showing the strength of a currency, is at a 50-year low.”

When Enough is Enough: Some analysts wonder if the government will intervene to prop up the yen for the first time since 1998 if sell-offs go too far. “It’s desirable for exchange rates to move stably, reflecting economic fundamentals,” Hirokazu Matsuno, the Japanese government’s top spokesperson, said Monday. “Any rapid movements are not desirable.”