In the summer of 1998, the Japanese currency slid to its lowest level against the dollar since the calamitous burst of the economic bubble seven years earlier. A senior finance ministry official, Haruhiko Kuroda, cautioned that an excessive fall in the yen was negative for the Japanese economy.
Nearly one-quarter of a century later, Kuroda is the governor of the Bank of Japan and sounds a familiar refrain as the yen continues its descent through a 24-year low, again breaking the level of ¥137 against the dollar and leaving traders uncertain when the slide will stop.
“The recent rapid acceleration of the yen’s decline is not desirable,” Kuroda said last month, following discussions with Prime Minister Fumio Kishida. It was a change of tune for the central banker, who had until then suggested a weaker yen could have benefits for the economy.
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The debate within Japan on the depreciating currency has become increasingly fierce. Dust jackets in bookstores set out clashing theories on the yen in bold type: one apocalyptic title of a business book reads The Weak Yen Will Destroy Japan while another bullishly predicts that “a cheap Japan” would revive the nation.
At the heart of the debate around the yen is the question of whether Kuroda’s decade-long ultra-loose monetary policy can withstand the pressure of global inflation. As the interest rate differential between Japan and the US has widened, investors have dumped the currency and sent it to historic lows.
Analysts say the yen — and Japan’s economy — stands at a critical juncture with two starkly different outcomes, depending on the next steps that will be taken by the central bank.
If the BoJ sticks to its guns while the US Federal Reserve continues to raise interest rates, the yield divergence could spell a further collapse in the yen beyond the 24-year low.
But if the BoJ moves to tweak its monetary policy, or if a global recession prompts a U-turn in US interest rates and a flight to safe havens, it could trigger an abrupt reversal.
“As the risk of a US recession increases, the risk of a reversal to a strong yen over the medium to long term is also increasing,” says Yujiro Goto, FX strategist at Nomura. “Past price action shows that during a stagflationary period, the yen tends to depreciate against the dollar, while during a recessionary period, the yen tends to appreciate.”
Japan has suffered the same shocks that have affected the global economy amid a surge in oil and gas prices caused by Russia’s invasion of Ukraine. But while consumer price inflation has soared above 8 per cent in the US and the UK, Japan’s headline inflation remained at 2.5 per cent in May — only slightly above the central bank’s 2 per cent target.
The reason for that differential is wages. While the post-pandemic recovery has brought significant wage pressure in the US and Europe, in Japan there has been almost no pass-through from higher commodity prices to employee earnings.
In a video recording of a seminar released this week, Kuroda said persistent deflation between 1998 and 2013 had made companies cautious about raising wages. “The economy recovered and companies recorded high profits,” he said. “The labour market became quite tight. But wages didn’t increase much and prices didn’t increase much.”
In the nine months Kuroda has remaining in his term before he steps down in March, he must perform a delicate balancing act. His unwavering resolve to maintain negative rates and cap bond yields at zero reflects his judgment that Japan’s underlying economy is weak and would struggle to grow if rates were higher.
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At the same time, he wants to shift the mentality of Japanese consumers and get them used to rising prices: a vital step to sustain inflation at 2 per cent. In early June, Kuroda was forced to apologise for suggesting the Japanese public was growing more tolerant of inflation, amid a furious backlash from politicians and the public.
The combination of rising prices and a collapsing currency has squeezed consumers’ wallets, with everything from petrol and electricity to chocolate and instant noodles more expensive. Meanwhile, workers — beaten down by decades of stagnant pay — have largely given up the fight for higher wages that would better insulate them against higher prices in the shops.
Analysts are wondering just how much longer the BoJ can hold its course, as political winds shift and public unhappiness grows. But no path presents an easy way out. “Deflation has continued for three decades and price stagnation has become the social norm.
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The society as a whole does not tolerate rising prices,” says Kazuo Momma, the former head of monetary policy at the BoJ who is now executive economist at Mizuho Research Institute. “There is fundamentally no exit for the BoJ”. Source: FT
