What is happening to the Japanese currency?
At the end of the last century, Japan became the first major economy to cut interest rates to zero.
During the Covid pandemic, many other countries adopted this tactic to support their economies.
These countries are raising their interest rates again, but the Bank of Japan (BOJ) is expected to keep its main key rate below zero on Friday. And it’s bad for its currency.
The yen has long been considered a safe haven, which investors traditionally bought in times of crisis.
But that status is now on shaky ground. This year alone, it has lost more than a fifth of its value against the US dollar to its lowest level since 1990.
Why does this happen?
The fall in the yen was driven by the difference between interest rates in Japan and the United States.
Since March, the US Federal Reserve has aggressively raised its main interest rate – from 0.25% to 3.25% – as it tries to combat the rising cost of living.
Higher interest rates tend to make a currency more attractive to investors.
As a result, there is less demand for currencies from lower rate countries and those currencies lose value.
However, some experts believe that the weak yen reflects the state of the country’s finances.
The economy has barely grown over the past three decades. It is also the most indebted nation in the world.
Japan has also faced the demographic time bomb of a low birth rate and a population with the highest proportion of elderly people in the world.
The government has allowed some foreign workers to help solve the problem, but there is still strong opposition to immigration.
“There is no reason for the yen to strengthen,” says Takeshi Fujimaki, a former adviser to billionaire investor George Soros.
He expects the Japanese currency to hit 180 against the US dollar before finally crashing, as he has warned before.
Will Japan raise rates?
BOJ Governor Haruhiko Kuroda has repeatedly said the economy is too weak to sustain higher interest rates.
Like much of the rest of the world, Japanese consumers are grappling with rising inflation, but this has been welcomed by policymakers, who have long wanted prices to rise.
Mr. Kuroda says the bank’s current policy is necessary to help it achieve its 2% inflation target.
Indeed, for years, Japan has faced deflation or falling prices, which is bad for the economy, because when prices continue to fall, consumers tend to refrain from buying expensive items because they expect them to be cheaper in the future.
What can Japan do?
Japan had not intervened in the global currency market to support the yen for nearly two and a half decades.
Last month however, as the currency fell, authorities stepped in, spending $21bn (£18.3bn).
This helped for a short time, but soon the currency fell again, this time breaking through 150 yen to the dollar.
This would have triggered a new intervention, this time with an estimated amount of 37 billion dollars.
The Japanese government has so far declined to confirm it has intervened again, although traders said they saw signs of another intervention earlier this week.
Experts have warned that these attempts to support the yen will only ever have a short-term effect.
“It’s to show the position of the Japanese government that they don’t want any further weakening of the Japanese yen,” said Eisuke Sakakibara, a former senior Japanese finance ministry official.
What does this mean for consumers and businesses?
The weak yen makes everything Japan buys more expensive.
The country is heavily dependent on imported oil and gas. Due to exchange rates and rising energy prices, the amount of money spent on imports last month jumped 46%.
But it’s not all bad news for businesses. Money earned abroad by Japanese exporters is worth much more at home. As exports represent about 15% of the country’s total economic activity, this is not negligible.
However, Japanese consumers have seen their purchasing power halve over the past decade. Ten years ago, 10,000 yen would buy an item worth $132, but today that only gets you something worth $67.
This is a major problem because average salaries in Japan have barely increased for more than three decades.
The problem is even more acute when people have to use the yen to pay for things abroad, such as when traveling or when their children study abroad.
Is this good news for tourists?
When the yen started falling, Japan’s borders were still closed, so people didn’t feel much of an effect.
However, now that Japan has started allowing visitors into the rolling value of the currency, the country is more appealing to tourists as their vacation money goes further.
In 2019, Japan welcomed 32 million foreign visitors, who spent around 5 trillion yen ($33.6 billion; £29.7 billion).
While tourist numbers are still far from that level, investment bank Goldman Sachs has predicted inbound spending could reach 6.6 billion yen in the year after the country fully reopens.