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Dropping JPY at Threat

Updated: Dec 26, 2022

First time hitting 150 yen for $1 in decades

On 20 October, Japan's yen hit its weakest level since August 1990. As a part of the Japanese population, I was shocked by the news despite having expected the situation.

Today, I would like to discuss why JPY has lost value in the world. There is one direct cause of why JPY is getting weaker day by day. However, the root causes behind it are what makes the situation so weighty for Japan.

Why is JPY so weak now? – direct cause

One crucial reason is that Japan’s central bank is keeping interest rates at low levels while the Federal Reserve and other central banks are conducting outsized rate hikes. This makes dollar-denominated assets and foreign assets from other developed countries more attractive to investors.

Implications of "High" Interest Rates:

Both pros & cons exist.

  • The higher the interest rates, the more valuable the country's currency is.

  • Attract foreign investment & increase the demand for the country's currency.

  • Lower cost of borrowing.

  • A decline in real values of savings if inflation is higher than the interest rate.

Why can't Japan just increase interest rates? – indirect causes of weak yen

Unfortunately, the Japanese government is heavily indebted, and this builds an obstacle for the central bank to raise interest rates. Japan's economic recovery has always remained moderate, and the ongoing trade deficit and additional government bonds used for fighting the Covid-19 pandemic have largely damaged the national budgets.

While the voices for immediate action are spreading, the Governor of the Bank of Japan (BOJ), Haruhiko Kuroda, has repeatedly commented that it is too early to cut back on monetary easing as the long fight against deflation is not yet over in Japan.

In recent years, Japan's price growth has been much faster than in the US, and this October has brought possibly the most damaging increase in all goods' prices. The BOJ indicates that, due to the continuing rise in prices and the stagnant economy, the government is trying to prioritize cement inflation by keeping the interest rates at the same level.

Whether we like the way it is now or not, what's concerning Japanese people now is that our economy is collapsing in the world. The government has kept ignoring the abrupt weakening of the yen, and BOJ is not even concerned about changing the policy, claiming it is for the best.

Thank you for reading !!

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