The Japanese yen has continued its sharp decline recently, reaching levels not seen in the currency in 38 years. In Thursday’s trading, the yen fell 0.4% to 156.14 yen against the US dollar, the lowest level since July. Despite this significant depreciation of the yen, Japanese stocks continued to decline for the third consecutive session, raising questions about the reasons behind this phenomenon.
The yen’s weaker is mainly related to interest differentials between Japan and other major economies, particularly the United States. The US Federal Reserve continues to raise interest rates to combat inflation, while the Bank of Japan is committing to a very accommodative monetary policy to maintain support for the Japanese economy.
Despite the yen’s decline, the decline in Japanese stocks reflects broader economic challenges. While a currency depreciation may seem useful in boosting Japanese exports by making Japanese goods more competitive in global markets, this decline could create pressure on local firms.
The high cost of imported raw materials, especially oil and metals, may negatively affect the profits of Japanese companies and increase production costs. In addition, import-dependent companies may It finds itself having difficulty adjusting to the high cost of imports.
Investors also fear that the continued weakening of the yen could reflect negatively on the economic outlook in Japan, as this could cause concern about domestic inflation and rising consumer prices. In this context, investors remain skeptical about the Japanese government’s ability to intervene effectively to support the yen without negatively impacting the overall economy. This suggests that Japanese markets may face additional challenges in light of this ongoing currency depreciation.
The Impact of Yen Weakness on Inflation in Japan
The Japanese yen has recently been witnessing a significant decline, raising questions about the impact of this weakness on inflation in Japan. When a local currency depreciates, it can have significant effects on domestic prices, especially in a country like Japan, which relies heavily on imports to meet its commodity and energy needs.
One of the most direct effects of yen weakness is the increase in the cost of imports, which leads to an increase in the prices of imported goods such as raw materials and energy, which reinforces pressures. Inflationary in the Japanese economy.
As the yen weakens, imported goods become more expensive for Japanese consumers and businesses, leading to increased production costs. For example, with high oil and gas prices, the Japanese economy faces additional challenges, as Japan is one of the world’s largest energy importers. This is directly reflected in domestic prices, leading to increased inflation.
The weakening of the yen also makes it difficult for local companies to reduce production costs, which increases the costs of goods and services and affects The End on the Japanese Household Budget.
Although a weaker currency may be beneficial for exports, as Japanese goods become cheaper for foreign consumers, there is a downside to this phenomenon, especially when imports make up a large part of Japan’s needs. Although a weaker yen could help support Japan’s manufacturing sector and attract foreign investment, inflationary effects could put pressure on citizens who are already suffering from the rising cost of living.
Moreover, the Bank of Japan may find itself in a difficult position, as higher inflation resulting from a weaker yen could reduce consumers’ purchasing power. The central bank may have to make difficult decisions on monetary policy.
The impact of US interest policy on value of the yen
US interest policy significantly affects the value of the Japanese yen, due to the interrelationship between US interest rates and the global currency market. When the US Federal Reserve raises interest rates, returns on assets denominated in US dollars become more attractive to investors.
As a result, the demand for the US dollar is increasing and becoming stronger compared to other currencies, including the Japanese yen. This leads to a depreciation of the yen against the dollar, as investors seek to transfer their money to assets with the highest returns provided by the United States. Interest rate differentials in the United States and Japan are key factors determining the direction of yen movement.
While the Federal Reserve raises interest rates to combat inflation and promote economic stability, Japan has been very accommodative monetary policy for many years, maintaining very low or sometimes even negative interest rates, with the aim of stimulating economic growth and encouraging spending and investment.
When the U.S. adopts a policy of raising interest rates, it has a direct impact on global capital flows. Many investors turn to the US dollar in response to rising yields, which strengthens it and puts pressure on other currencies, including the yen.
At the same time, Japan remains relatively neutral in terms of yields, which means that the yen does not offer much attraction to investors in an environment where US yields are high. In addition to the impact of US monetary policy on the movement of the yen, there are also indirect effects related to the Japanese economy.
When the US dollar rises as a result of interest rate hikes in the US, the dollar becomes stronger making Japanese goods more expensive in international markets.
