The yen loses its status as a safe asset

The yen is showing signs that it is no longer a safe asset.

The yen-dollar exchange rate hit 120.4 yen per US dollar at 4 p.m. on March 22, the highest since February 1, 2016. Since the Russian invasion of Ukraine on February 24, the value of the yen fell 4.7% or so. On the other hand, a strong dollar has held up 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 the financial easing and weaker yen to lead to higher exports and corporate profits, which would lead to more investment and consumption.

However, prolonged low interest rates in Japan backfired. Market interest rate differentials widened relative to those in the United States, etc., and money continued to flow out. Currently, the yield on 10-year government bonds is close to 0% in Japan and above 2% in the United States. The demand for the Japanese currency can only decrease and a fall in its value is inevitable.

The decline is accelerated by the weakening of the fundamentals of the Japanese economy. Japan recorded a current account deficit of 370.8 billion yen in December and 1.1887 billion yen in January as international commodity prices surged. If there is a current account deficit, Japanese companies have to sell the yen and buy the US dollar for payment, and then the value of the Japanese currency falls further. Additionally, with an increasing number of Japanese companies doing business overseas, the need for a JPY-USD exchange is diminishing, which means less 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 rapidly shrinking without structural reforms or productivity innovations to compensate. This implies that the value of the currency will continue to fall.

However, the Japanese government is unlikely to change its monetary policy. The Bank of Japan noted on March 18 that the monetary easing would continue, adding: “The problem is not the weakness of the yen but a rise in the price of oil and, rather, the weakness of the yen is currently contributing to the ‘Japanese economy’. Contrary to his words, experts point out that Japan is not in a position to raise interest rates. “Japan’s national debt-to-GDP ratio stood at 258% in 2020, second only to Venezuela,” one said, adding, “The Japanese government’s interest burden will skyrocket if rate is raised.


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