A shift in international economic relations is looming in the Far East, which is likely to cause unrest in the capitals and on the financial markets.

The Japanese yen has lost nearly 19 percent against the dollar since early March.

It is around 11 percent to the euro.

An end to the devaluation trend is not in sight for a long time.

The Federal Reserve and the European Central Bank will be busy for months to stem the surge in inflation by raising interest rates.

In contrast, the Bank of Japan (BoJ) is sticking to its aggressive, expansive monetary policy without flinching: with a negative interest rate at the short end of the interest rate curve and a targeted zero percent rate for government bonds with a term of ten years.

Although Japan's consumers and businesses are increasingly grumbling about imported inflation and expensive imports, the Bank of Japan has the government's support.

Addiction to the weak yen hits many addicts in Japan.

Inevitably, however, the divergence in interest rates causes the value of the yen to plummet in the forex market.

The yen-dollar exchange rate has already risen to a 24-year high of more than 136 yen per dollar.

The historical dimension is not only there.

Since the global financial crisis, Japan has been used by many in Europe and America as a role model to rip off banks or to ease government debt with zero interest rates and the purchase of government bonds.

With the surge in inflation, which has hitherto only been moderate in Japan in contrast to America and Europe, the paths are now parting again, at least in monetary policy and hopefully in the long term.

Japanese monetary and economic policy is not that attractive as a permanent solution.

With lots of money, she keeps zombie companies alive and puts the domestic economic dynamic to sleep.

Impending currency war

The international risks of the yen devaluation are obvious.

Some observers do not rule out a price increase to 150 to 160 yen per dollar.

With the threat of a recession looming, how long would the United States put up with that?

China could also accuse Japan of instigating a currency war.

There is a historical precedent for this.

A look back 24 years leads to the Asian crisis of 1997/98.

At that time, the yen exchange rate rose to as much as 146 yen per dollar, and there was a fear that not only Thailand, Malaysia or South Korea, but also China would devalue against the dollar as a reaction to the yen's weakness.

China resisted the temptation, partly because the Clinton administration made concessions to Beijing and verbally shelved the policy of the strong dollar.

Such a consensus seems out of reach today as long as President Biden sees China as an economic and geopolitical competitor.

As coherently as the devaluation of the yen can be explained by the interest rate differential, this thought obscures the deeper reason: the weakness of the Japanese economy.

In America, and to some extent in Europe, inflation is fueled by an economic recovery.

But Japan's economy is too weak to turn cost-push inflation into demand-driven inflation.

The governments have not used decades of extremely loose monetary policy to educate the economy more growth power and dynamism through supply-side corrections.

It's paying off now.

In terms of monetary policy, the motto is “keep it up” and the argument that the weak yen is bringing net benefits to Japan comes into play.

But these are becoming increasingly difficult to recognize.

Because the big exporters are producing far more abroad than they used to, they are benefiting less and less from the weak yen in exports and more and more through repatriated profits.

Domestically, the negative aspects of the weakness of the yen, i.e. rising import costs, are gaining in importance.

At the same time, the costs of the very loose monetary policy are increasing.

The Bank of Japan is braving the upward pressure on long-term interest rates with all its might and has sharply increased its purchases of government bonds.

The tensions on the capital market are increasing.

A turnaround in Japanese monetary policy is not to be expected.

Governor Haruhiko Kuroda sees his mission as yet unfulfilled.

The fate of the yen and all associated upheavals will thus be decided in America.

Only when fears of recession outweigh inflation fears in the Federal Reserve will the yen overcome its weakness, but not on its own.

Keywords: