Japan and the Curse of the Weak Yen

The Japanese economy is going to have a relatively hard time in the aftermath of the corona crisis. This puts the traditionally strong yen under increasing pressure.

The currency world sometimes talks about the curse of the strong yen. The strength of the currency - partly due to its role as a safe haven in times of uncertainty - sometimes makes Japanese export goods relatively expensive in international trade. In recent months, however, the yen has been steadily losing ground.

After the first week of May, the currency has fallen by almost 10% against the euro. Admittedly, that move says as much about the strength of the euro as it does about the weakness of the yen. But it is a clear signal that there is a price in the foreign exchange market for the massive stimulus packages that the Japanese government and central bank have unfolded.

much needed
These support measures were also badly needed. Looking at economic data from Japan, it doesn't seem so surprising that the yen is under pressure. It was recently announced that the economy contracted by 27,8% between the beginning of April and the end of June compared to the same period in 2019.

Of course, Japan is not the only country where the coronavirus is causing major economic damage, but compared to other countries in the region, the economy is relatively hard hit. In addition, the economy was already in recession before the virus really took hold. Due to an aging population and a shrinking population, economic growth in recent decades has rarely come close to a paltry 2%.

nice tailwind
The low yen is a pleasant tailwind for Japan's export sector, but the benefits should not be overstated. In the 60s and 70s, a thriving export industry was still the main driving force behind Japan's rise. The economic momentum eventually propelled the country into the second-largest economy in the world, until China took over that position 10 years ago.

In recent decades, Japanese companies have relocated much of their production to other countries. As a result, the yen's price antics are having less of an impact on business than in the past. However, there are many advantages to a cheap yen. As goods imported from abroad become more expensive, the inflation that the country has long craved may finally pick up again.

powerless watching
If the yen's depreciation gains momentum, Japan won't have to watch helplessly. The country's foreign exchange reserve has grown by nearly $100 billion since the turn of the year to more than $1.400 billion. However, it has been a long time since the central bank had to step in to give the currency a boost.

The previous move dates back to the aftermath of the 1997 Asian crisis. At the time, the country bought nearly $40 billion worth of yen within months using dollars and other currencies. For the time being, such an intervention still seems a long way off. As far as the central bank and government are concerned, the currency may well continue to slide ahead of talk of the curse of the weak yen.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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