Hard blows for the yen less bad than it seems

Higher prices of food crops and energy make life a lot more expensive. This is especially true in Japan, where a steadily declining yen is causing consumers and businesses to pay more and more for imported products.

The Japanese yen has been in the corner where the blows fall lately. Against the US dollar, the currency has fallen by almost 15% since the beginning of March. The yen has hit its lowest point in more than 1,5 years. By far the most important reason for the sharp fall in prices is the large difference in interest rate policy. It is almost inevitable that the US central bank will raise interest rates by half a percent to 2022% next Wednesday. In the course of 0,1, there will undoubtedly be a few more interest rate hikes. Meanwhile, the Bank of Japan (BoJ) stubbornly keeps interest rates at -XNUMX%. Chairman Haruhiko Kuroda has already hinted that this will not change for the time being.

Extreme interest rate policy
The BoJ has had negative interest rates since 2016. And before that, the interest rate stood at 0% for years. The main reason for the extreme interest rate policy is that the authorities are unable to structurally raise inflation to the desired level of 2%. An important reason is that domestic consumption is under structural pressure as a result of aging and population decline. Moreover, the Japanese have become accustomed to a life without inflation and even to deflation. Why spend your money now when you can probably buy the same amount or even more goods and services in the future? This pattern now seems to be finally changing.

Low yen fuels inflation
Recently, the cost of living has risen rapidly in Japan. This is partly due to the same cause as the price increases in the Netherlands. Higher costs for agricultural raw materials and energy are driving up the prices of foodstuffs, gasoline and many more items. On top of that, the weakness of the yen is also making itself felt. Due to the depreciation of the currency, import goods that are settled in dollars have become considerably more expensive within a few months. Higher costs recently prompted sushi chain Sushiro to raise the minimum price of 38 yen for a meal for the first time in 100 years.

Higher prices, higher wages
The big question is whether rising prices also lead to higher wages. In that case, a new equilibrium is in sight, with the combination of modest inflation and somewhat rising wages acting as a lubricant for the economy. However, we are not there yet. In the run-up to midterm elections at the end of July, the Japanese coalition is not waiting for unrest among the population due to price increases. But as long as Kuroda keeps interest rates low, the falling yen is an additional source of inflation. He may very well be able to break the vicious circle and finally get wage and price increases going in Japan.

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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