The Japanese yen fell 1.6% to 153.96 against the US dollar at 12:58 p.m. Tokyo time, giving up gains over the past two days. This decline comes at a sensitive time, as financial markets are closely watching global market developments in general and the impact of US monetary policy in particular on the Japanese currency.
Despite the yen’s depreciation, Japanese equities performed positively. The Nikkei rose 3%, driven by a rebound in technology stocks, especially those related to the chip industry, which saw strong growth. The broader index also recorded a 2.1% increase, reflecting improved investor sentiment towards Japanese markets amid increasing demand for Japanese stocks by domestic and foreign investors.
Japanese markets face significant volatility amid these developments, with options volatility on the dollar-yen rising to record highs, reflecting uncertainty among investors. While this decline in the yen continues, the Bank of Japan faces significant challenges, feeling pressured to do more economic stimulus or take steps to raise borrowing costs to counter rising inflation.
These steps could increase Japan’s public debt costs, potentially affecting future fiscal policies. With increasing pressure on the Japanese economy as a result of these exchange rate fluctuations, the Bank of Japan remains in an awkward position.
The rising cost of imports due to the weaker yen could directly affect the purchasing power of Japanese citizens and increase internal inflation. As the Bank of Japan tries to balance expansionary monetary policy with economic stability, markets remain alert for the long-term changes the outcome of the U.S. election.
Relationship between yen decline & borrowing costs in Japan
The weakening of the Japanese yen has direct effects on borrowing costs in Japan, as the relationship between currency and interest rates is a central part of the Bank of Japan’s monetary policy. When the yen weakens, import costs rise due to higher prices of imported goods, leading to increased inflation within the Japanese economy.
This increase in inflation puts pressure on the central bank, which may have to adjust its interest policy to counter those Pressures. Through its extended monetary easing policy, the Bank of Japan is consolidating low interest rates with the aim of stimulating economic growth in an environment in which Japan’s economy is suffering from a prolonged contraction.
But as the yen weakens, an additional problem arises: borrowing costs must be raised to prevent hyperinflation caused by higher import prices. In this case, the Bank of Japan must make critical decisions to keep prices stable, which means that borrowing costs are likely to rise gradually.
At the same time, the yen’s decline increases Japan’s public debt servicing costs, creating challenges for a government that relies on borrowing to finance its economic projects. The increasing cost of borrowing leads to spillover effects on the economy, as it may increase the burden on businesses and households that rely on loans to invest or finance day-to-day expenses.
On the other hand, Japanese companies that rely on imports are under pressure as a result of the high costs of imported goods, which increases the cost of production and affects their profit margins.
Factors Contributing to the Decline of the Yen
The decline of the Japanese yen is one of the important issues that concern financial markets and investors around the world, as there are several factors contributing to this decline. One of the most prominent factors is the monetary policy of the Bank of Japan, which has been pursuing monetary easing for a long time in an attempt to stimulate Japan’s deflationary economy.
The Bank of Japan relies on ultra-low interest rates and massive asset purchase programs to boost liquidity in the local protection, which leads to a decline in the value of the yen due to the large supply of it in the market. Another important factor is the interest rate differentials between Japan and other economies, especially the United States.
If the US Federal Reserve decides to raise interest rates or implement tighter monetary policy, it will cause capital to flow into the US in search of higher yields. This move increases the demand for the US dollar and reduces the demand for the yen, which leads to its depreciation.
The differences also economic policy in the United States and Japan is contributing to the yen’s decline, as investors shift their money to more attractive markets. Economic and geopolitical tensions also play a large role in the impact of the yen’s value.
For example, economic turmoil in world markets, such as trade disputes or financial crises, can lead to increased volatility in the value of the yen. In times of global economic anxiety, investors tend to buy the yen as a safe haven, but in conditions of economic optimism or improvement in global markets, demand for the yen decreases and loses its value. In addition, the yen’s weakening may be a result of Japan’s rising trade deficit.
