Since the start of 2024, the dollar has risen more than 7% on the Tokyo Stock Exchange and briefly touched 152 yen in late March. The previous time such a high figure could be observed was back in July 1990.
Due to the record weakening of the national currency in 34 years, the Bank of Japan, the Ministry of Finance and the country's Financial Services Agency held an emergency meeting to discuss the situation. Following the meeting, the parties agreed to take all possible measures, not excluding currency interventions, to stop “disorderly and speculative fluctuations” in the exchange rate, writes Reuters.
As Bank of Japan Governor Kazuo Ueda said, the movement of the yen has a significant impact on price dynamics and the economy as a whole. In this regard, the regulator will closely monitor developments in the foreign exchange market, the head of the Japanese Central Bank assured.
Meanwhile, experts largely explain the rapid depreciation of the yen by the actions of the Bank of Japan itself. In particular, we are talking about the long-term maintenance of an “ultra-soft” monetary policy in the country, as Freedom Finance Global analyst Vladimir Chernov told RT.
Thus, back in the first half of the 1990s, the Japanese Central Bank sharply lowered its interest rate and for about 20 years almost continuously kept it near zero. At the same time, in 2016, the regulator completely lowered the bar to a negative level of -0.1% per annum, at which it continued to remain until recently.
“Japan has been pursuing a policy of near-zero interest rates for quite a long time to accelerate economic growth and combat deflation (decrease in prices for goods and services. -
RT
) ... The problem is that of all developed and developing countries, Japan was the last to abandon the policy of negative rates, while while other world central banks have long been positive,” noted Vladimir Chernov.
For example, the US Federal Reserve System (performs the functions of the country’s central bank) also kept the interest rate near zero for a long time, but already in 2022 it began to confidently increase it to curb inflation. As a result, in less than a year and a half, the Fed raised the bar 11 times: from 0-0.25 to 5.25-5.5% and continues to keep it at this level. It was the increased difference in interest rates between Japan and the United States that became the key factor in the weakening of the yen against the dollar observed today, experts believe.
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“The sharp tightening of monetary policy in the United States has led to the fact that it has become more profitable for investors who previously held their funds in yen to transfer money to more profitable dollar assets, since interest rates in the United States are much higher. That is, a speculative outflow of capital from the Japanese to the American market began, which resulted in a record drop in the yen exchange rate,” Sergei Suverov, associate professor at the Financial University under the Russian Government, explained to RT.
It is noteworthy that against the backdrop of the current situation, the Bank of Japan nevertheless decided to raise the interest rate and on March 19 set it at 0.1% per annum. However, as Sergei Suverov believes, this increase will not be enough to stabilize the yen exchange rate, and the regulator is also prevented from tightening monetary policy by a large public debt. A similar point of view was expressed by Russian Ambassador to Japan Nikolai Nozdrev.
“Considering that the Japanese government is now tied hand and foot by a colossal burden of public debt, and Japan’s public debt is 2.5 of the country’s GDP, this is a huge figure... increasing the long-term interest rate would lead to a sharp increase in the burden of servicing this very public debt. And at present, the Japanese government, of course, is not ready for such radical measures,” the diplomat said on the Russia 24 channel.
According to the American Institute of International Finance (IIF), by the beginning of 2024, Japan's public debt amounted to approximately 230% of the country's gross domestic product. At the same time, the total debt of the government, population, companies and financial organizations of the Asian state reached almost 604% of GDP. These are the highest figures in the world.
Losing positions
Since the start of interest rate increases in the United States, in the spring of 2022, the yen has already fallen in price against the dollar by about a third. According to Vladimir Chernov, such a weakening of the national currency has led to a sharp increase in the price of fuel, food and a number of other imported goods for ordinary Japanese. Against this background, domestic demand in the country decreased, and already in the second half of 2023, the economy of the Asian state was on the verge of recession.
According to the International Monetary Fund, Japan's GDP growth will continue to gradually slow down over the next few years and will not exceed 1% per year. Under these conditions, by 2030 the country may leave the four largest economies in the world in terms of purchasing power parity (PPP) and give up its place to Russia, the Russian government does not exclude it.
“The Russian economy ranks fifth in terms of gross domestic product in PPP terms. Calculations show that Russia can become the fourth economy in the world, ahead of Japan, provided that sustainable growth of at least 2% per year is maintained with a gradual acceleration by the end of the period to 3%,” said First Deputy Prime Minister of Russia Andrei Belousov earlier.
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Let us explain: GDP at purchasing power parity is the total value of all goods and services produced, calculated taking into account differences in price levels and exchange rates in different countries. It is believed that this indicator best reflects the real situation in the economy.
“GDP calculated at purchasing power parity takes into account the comparison of prices of goods and services in different countries, expressed in the same currency, such as dollars. This indicator is more objective for comparing the size of economies of different countries than just the nominal volume of GDP, converted from rubles to dollars,” explained Andrei Loboda, economist and director of communications at BitRiver, to RT.
According to the World Bank, from 2016 to 2020, the five largest economies in the world in terms of PPP remained China, the USA, India, Japan and Germany, and the Russian Federation occupied only sixth place. However, in 2021, Russia overtook Germany and since then has been steadily reducing the gap with Japan.
“If, in addition to the objectively slowing economic growth in Japan, interest rates also begin to rise, then next year the country could definitely face stagnation at best, and recession at worst. Russia needs to take advantage of this,” added Andrei Loboda.