How far will the Japanese currency fall? Since the start of the year, the yen has plunged 12% against the greenback, including 5% in April alone. Thursday, May 5, it even took nearly 130 yen (about 0.95 euro) to obtain a dollar – unheard of for twenty years –, against less than 115 yen on March 7. The 0.5 point increase in US key rates announced on May 4 and the prospect that the movement will continue in the coming months could further accelerate the decline of the Japanese currency. “The reason for the recent depreciation of the yen is quite clear: the very large divergence in monetary policy between the Bank of Japan (BoJ) and almost all of the other central banks in the world”analyze Laetitia Baldeschi and Bastien Drut, economist at CPR AM, in a note on the subject.
In the past, declines in the yen were appreciated, even supported by Japan to support exports. This time, some caution seems appropriate. The Minister of Finance, Shunichi Suzuki, took advantage of the April 20 meeting of the big moneymakers of the G7 to express his fears over “the recent somewhat abrupt depreciation of the yen”.
Imported inflation
At the last meeting of its policy council, on April 28, the BoJ nevertheless maintained its ultra-accommodative monetary policy, with negative interest rates. The institution now expects consumer prices to rise by 1.9% (excluding fresh products) over the 2022-2023 financial year, which began on 1er April, against a previous forecast of 1.1%. But this is essentially imported inflation, because, excluding energy, the rise should be limited to 0.9% in 2022-2023. The BoJ is still far from reaching its 2% inflation target, a target set in 2013, but never achieved in a country dominated, according to its governor, Haruhiko Kuroda, by a “deflationary mentality”.
The BoJ also wants to support a slowing economy. “The business confidence index, the Tankan, revealed a decline in the business climate in the first quarter and the BoJ revised down its assessments of the economy of seven of the country’s nine regions”, recalls Takahiro Sekido, an analyst at MUFG bank. Affected by the Covid-19 pandemic and the war in Ukraine, the world’s third-largest economy is expected to grow by only 0.4% in the first quarter, compared to 1.1% between October and December 2021.
“The economy cannot withstand a rate hike”, Ryutaro Kono, economist at BNP Paribas Japan
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