Turmoil in the currency market continues in the lead up to the next meeting of the Federal Open Market Committee (FOMC) of the United States Federal Reserve Board (FRB) scheduled for September 20 and 21.
Anticipating further major interest rate increases, on September 2 the value of the Japanese yen plummeted to just below 140 yen to the US dollar on the Tokyo Foreign Exchange Market. It was the first time in around 24 years that it has weakened to that level.
It was also down roughly 25 yen from where it stood at the end of 2021. With Japan lagging in its recovery from the COVID-19 pandemic, the negative effects of “bad price increases” resulting from the cheaper yen are increasingly visible.
The trigger for the sharp decrease in the value of the yen was a hawkish speech given by FRB Chairman Jerome Powell on August 26. In the speech, Powell expressed strong resolve to raise the benchmark interest rate to stem the rampant inflation that is causing pain for family budgets and companies alike in the United States.
BOJ’s Kuroda Takes Different Tack
Meanwhile, Bank of Japan Governor Haruhiko Kuroda told the July meeting of the Bank of Japan Monetary Policy Meeting that he has “absolutely no intention of raising interest rates.” Kuroda thus signaled that he will stick stubbornly to his monetary easing strategy.
Investors have duly taken note of the divergent trajectories for US and Japanese monetary policies. Increasingly, they are selling yen to buy US dollars promising a higher yield. That in turn increases the downward pressure on the Japanese yen.
The result is that price rises are becoming acute, even in Japan. The consumer price index (excluding fresh food) on a year-on-year basis has topped the BOJ target of two percent in four consecutive months through July 2022.
Among the various factors causing import prices to rise, it is estimated that the cheap yen accounts for close to half of the total. If the cheap yen trend continues, it is likely that the pressure for price increases on items such as everyday necessities and home electrical appliances will further increase.
Lagging Wages a Problem
The biggest problem is that there have not been corresponding increases in wages. In order to create conditions fostering “good price increases,” the BOJ is determined to stick to its monetary easing stance, come what may, in order to stimulate economic activity by businesses and households.
Tomo Kinoshita, global market strategist at Invesco Asset Management (Japan) Limited, says: “After the summer, prices for things like airplane tickets and lodging should drop. The price situation in the United States should calm down in a few months, and then we should see the trend reverse in the direction of endaka.”
More Pain to Come?
For the time being, Kinoshita expects the exchange rate to move roughly in the 130-140/yen to the dollar range. However, some analysts are concerned that the yen’s value may fall even further.
The rapid rise in US interest rates is inflicting severe damage on developing economies. Money that had been supporting these developing economies is beginning to flow to developed economies, and if the value of the currencies of these developing countries continues to decline, that will increase their foreign debt burden.
Toru Nishihara, chief economist at Dai-Ichi Life Research Institute Inc. points out:
Even if the developing countries want to take steps to halt the deterioration in their economies, they have no choice but to keep pace with the rising US interest rates if they want to control skyrocketing prices. Therefore, we can expect to see the continuance of punishing economic conditions in the developing countries.
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(Read the report in Japanese at this link.)
Author: Aya Yonezawa