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Yen at risk of downward spiral fueled by trade deficit, BOJ easing

  • March 30, 2022
  • , Nikkei Asia , 3:45 a.m.
  • English Press

SETSUO OTSUKA, Nikkei staff writer


TOKYO — The yen’s recent nosedive has heightened fears of a vicious cycle as Japan’s worsening current-account balance threatens to spur more selling.


A soft yen was long seen as a boon to Japan’s economy. But with the benefits now tilted toward certain exporters and the wealthy while individuals and small businesses feel the pain of higher commodity prices, Japan may need to rethink a fundamental assumption of its economic approach.


After touching 125.1 to the dollar on Monday — its weakest point since August 2015 and approaching that year’s nadir of 125.86 — the yen rebounded slightly in volatile trading Tuesday to about 123 to 124 in Tokyo. An estimate of the yen’s theoretical value may have fallen beyond 120 to the greenback, pointing to deeper problems than short-term speculation.


The immediate cause of the yen’s weakness is a split in monetary policy between Japan and the U.S. The Bank of Japan on Monday and Tuesday offered to buy unlimited amounts of Japanese government bonds to tamp down interest rates at a time when U.S. Treasury yields have soared as the Federal Reserve tightens policy to rein in inflation, encouraging traders to sell yen for dollars.


But the softening trend began before that, rooted in the more fundamental issue of Japan’s changing trade position.


A cargo ship and containers are seen at a port in Tokyo. The nation’s robust imports have led to a trade deficit, which puts further downward pressure on the yen.   © Reuters

In January, Japan’s current-account deficit topped 1 trillion yen ($8 billion). Imports in value terms have been ballooning amid coronavirus-related supply constraints and a commodities rally fueled by the war in Ukraine. Japan’s terms of trade, or the ratio between its export and import prices, have deteriorated, and more of the country’s income has flowed overseas as import costs have swelled.


These factors affect the underlying value of the yen.


The Nikkei equilibrium exchange rate calculated by Nikkei and the Japan Center for Economic Research stood at 105.4 yen to the dollar in the third quarter of 2021. Adjusting for shifts in Japan’s current-account balance and terms of trade since then puts the equilibrium rate at 121.7.


Market exchange rates often differ from the theoretical figure, reflecting short-term speculative trading and day-to-day conditions. Based on the average deviation between past equilibrium and market rates, the yen still has room to soften to about 130 against the dollar.


What is more, there remains a risk that Japan’s worsening current-account balance and terms of trade could bring on more yen selling in a vicious cycle.


Importers selling yen for dollar funds is “a root cause of the yen’s accelerating depreciation,” a bank executive said. A weaker currency in turn drives up the cost of imports in yen terms, which can further widen the current-account deficit. Worse terms of trade also make Japanese companies less competitive and add to the downward pressure on the yen.


BOJ Gov. Haruhiko Kuroda has stressed that the central bank has not changed its basic position that a weak yen is favorable for Japan’s economy and prices. But the benefits tend to go mainly to a few exporters and affluent individuals with overseas assets. The vast majority of people and smaller businesses are likely to feel the pinch, and a yen-depreciation spiral would aggravate the pain.


Recent Japanese economic policy — particularly former Prime Minister Shinzo Abe’s signature Abenomics program — has centered on boosting corporate profits via a weak yen and waiting for the benefits to trickle down to households. But this approach has not brought meaningful wage growth.


Prime Minister Fumio Kishida seeks to tackle rising prices with measures including extending fuel subsidies, an approach criticized by some analysts.


“It’s just treating the symptoms,” said Tohru Sasaki, head of Japan market research at JPMorgan Chase Bank in Tokyo. “Simple fiscal expansion while the BOJ continues to buy government bonds could bring on more depreciation.”

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