The yen exchange rate temporarily dropped to the low 135 yen level per dollar in the Tokyo foreign exchange market yesterday (13th), and the yen depreciated for the first time in about 24 years.

There are also concerns about the rapid depreciation of the yen and the appreciation of the dollar, including further increases in raw material costs.



Why does the depreciation of the yen not stop?

What is the BOJ's speculation?

I will explain the background.

The depreciation of the yen also hits bakeries!

This long-established bakery in Asahi-ku, Osaka, which has been in business for 62 years, uses not only domestic flour but also Canadian and American flour.



However, it is said that the purchase price has risen by more than 10% compared to the same period last year due to the influence of the recent rapid depreciation of the yen in addition to the rise in wheat prices due to Russia's invasion of Ukraine.



For this reason, the store has been raising the price of about 20 types of products one after another, but further raising the price by devising ways to prevent the taste from changing even if the amount of oil and butter used for bread is reduced. We are making efforts to avoid.



The president of the operating company said:



"Management is becoming more and more difficult, and as the purchase price rises, it becomes even more difficult. I want to prevent further price increases through management efforts."

Why is the yen depreciating?

What is the "interest rate difference"?

Behind the depreciation of the yen is the "interest rate difference" between Japan and Europe and the United States.



The direction of monetary policy of the Bank of Japan, which continues to carry out large-scale monetary easing, is different from that of central banks in Europe and the United States, which are rushing to tighten monetary policy to curb record inflation.

Of these, long-term interest rates in the United States remained at [around 1.5%] until the end of last year.



However, in February of this year, when concerns about inflation increased due to soaring raw material prices following Russia's invasion of Ukraine, the Fed, the central bank of the United States, will tighten monetary policy [2]. % Level].



Since then, long-term interest rates have continued to rise against the backdrop of the Fed's view of accelerating monetary tightening in response to record inflation, rising to the [3% level] for the first time in 3 years and 5 months last month.

On the other hand, Japan's long-term interest rates have been suppressed to around 0% as part of the Bank of Japan's large-scale monetary easing, with a de facto upper limit of around 0.25%.



The interest rate differential between Japan and the US, which was about 1% at the beginning of the year, has now tripled to about 3%, leading to a move to buy dollars with higher yields and sell yen.

The difference between Europe, America and Japan is clear

Regarding future policies, the differences between Europe, the United States and Japan are becoming clearer.



The Fed in the United States decided to raise the interest rate by 0.5% last month after raising the policy interest rate in March and lifting the zero interest rate.

In addition, significant rate hikes are expected this month and next month.

The Bank of England in the United Kingdom is expected to raise rates five times in a row this month, and the Central Bank of Europe plans to raise rates for the first time in 11 years next month.



On the other hand, the Bank of Japan has adhered to its current policy of continuing large-scale monetary easing, and this difference in direction has led to the view that interest rate differentials will continue to widen.

Governor Kuroda Why stick to monetary easing?

The Bank of Japan has indicated that it will adhere to large-scale monetary easing, including the statement by Governor Kuroda that "there is no situation in which monetary tightening will be carried out."



The reason is that



"Japan's economy and prices are very different from those in Europe and the United



States. "



What exactly does that mean?

1. Japan does not recover to GDP level before the expansion of the new corona

First, the scale of GDP = gross domestic product was 541 trillion yen on an annual basis in the October-December period of 2019, while it was 538 trillion yen in the January-March period. Therefore, it is said that the level before the spread of the new corona has not been restored.

2. If you tighten it now, it may cool the economy.

In addition, the nominal wage per worker in April increased by only 1.7% compared to the same month of the previous year, reflecting the economic recovery, but the increase is moderate. It is supposed to stay.



For this reason, if monetary easing is stopped and tightening is started at this stage, there is a risk that the economy will cool down due to rising interest rates.



The Bank of Japan says it will continue to ease monetary policy persistently in order to create a virtuous cycle in which both wages and prices rise.

However, regarding the impact of the weak yen ...

Governor Kuroda says that the rapid depreciation of the yen raises uncertainty about the future and makes it difficult for companies to formulate business plans, which is "negative and undesirable for the economy."



While the United States is accelerating monetary tightening, if the Bank of Japan continues monetary easing, there is concern that the interest rate differential will widen further and the yen will depreciate further, which will have a greater negative impact on the economy.



In other words, the BOJ is faced with a difficult steering, with the dilemma that both maintaining easing and tightening can worsen the economy.

Keizai Doyukai Representative Secretary Sakurada "Acceleration of yen depreciation is quite serious"

At a regular meeting on the 14th, Keizai Doyukai's secretary-general Sakurada said, "The current trend of yen depreciation will not return immediately, and inflation in Japan can accelerate further due to increased costs due to clogging of energy, food and logistics. I think consumers and companies take the depreciation of the yen negatively. "



In addition, Mr. Sakurada said, "I think the depreciation of the yen is due to the interest rate differential between Japan and the United States, but it gives the world the impression that Japan's ability to grow, earn, and make good products is weak. However, if the depreciation of the yen is accelerating, we must take it very seriously. It is important to take action. "



He also acknowledged that it is important to enhance Japan's industrial competitiveness in order to correct the unilateral depreciation of the yen.

The yen will continue to depreciate until around summer ...?

Regarding the outlook for the future, Kentaro Matsuda, Deputy Senior Researcher at the Japan Research Institute, said, "The Fed is expected to continue to take a strong stance toward controlling inflation until around the summer of this year. Long-term interest rates are still rising, so it wouldn't be strange to reach a level of around 140 yen per dollar. "



However, he pointed out, "If the United States raises interest rates too much, there is a concern that the US economy will inevitably slow down, and in that case, the yen may strengthen."



On top of that, Mr. Matsuda said, "If exchange rates continue to fluctuate and become unstable, Japanese companies will become more uncertain when formulating future business plans, which will have a greater negative impact on the economy."

What do you do for the remaining year?

Kuroda Bank of Japan Monetary easing and yen depreciation dilemma

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