Clear path for the Japanese yen

Unlike forty years ago, Japan seems to be somewhat out of the picture for the time being with all the protectionist measures of the United States. That does not alter the fact that the yen is clearly on the rise for the time being.

After a few chaotic weeks in the aftermath of 'Liberation Day', US President Donald Trump seems to be focusing his trade focus primarily on China. In neighbouring Japan, for example, companies and politicians can breathe a sigh of relief for the time being. Forty years ago, the country had to pay the price in this regard. Between 1980 and 1985, the yen had lost about 50% of its value compared to the dollar and other Western currencies such as the pound and the German mark as the precursor to the euro. As a result, Japanese products became increasingly cheaper in other countries. Thanks to a flourishing export industry, the country experienced a period of strong economic growth.

Interest of almost 20 percent
The United States, on the other hand, was struggling economically. Then-Fed Chairman Paul Volcker had raised the policy rate to almost 80% in the early 20s in an attempt to control the rising inflation. He eventually succeeded, but the high interest rates put a serious brake on economic growth. Under pressure from a package of protectionist measures, Japan entered into negotiations with Western countries at the time. As part of the Plaza Accord of 1985, the yen rose sharply in the following years. The Japanese export sector suddenly found itself in a much more difficult position and after a period of strong growth, the country suddenly found itself in a prolonged period of economic stagnation.

Working population is getting smaller
Meanwhile, things are looking significantly better for Japan economically. Last week, the central bank cut its expected growth rate for the current year from 1,1 to 0,5%, but that is a reasonable pace for a country where the working population has been shrinking for XNUMX years, amid increasing economic uncertainty. After three rate hikes in just over a year, the Bank of Japan has paused for a while with its policy rate. Since inflation looks set to be in line with the official target in the coming quarters, there is certainly room to raise rates again later this year.

Bank of Japan hits the brakes
The shrinking interest rate differential with the United States is a major reason why the yen has risen by more than 10% against the dollar since the turn of the year. Another factor is that many parties see the currency as a safe alternative to the dollar as a result of Trump's unpredictable policy. After a 25% drop in value within five years, there is still plenty of room for the yen to recover further. However, there is a good chance that Japan will hit the brakes if the price increase is too rapid. In that case, traders will sell their investments, particularly in American technology shares, to repay the Japanese loans taken out at low interest rates. In the current, turbulent economic climate, no one is waiting for such a shock moment.

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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