The yen has weakened markedly this year as U.S. monetary policy has been tightening. The speed of Yen depreciation accelerated after the Fed started its interest rate hike cycle in March and announced a 25-basis-point increase in the benchmark interest rate on March 16.
The Nikkei's currency index of the world's leading currencies showed the yen declined 5.7 percent in the first quarter of 2022, second only to the Russian ruble. In particular, the yen has fallen nearly 15 percent against dollar since March. The exchange rate fell to 131 yen per dollar on April 28 from 114 yen per dollar on March 1.
Nomura Research Institute researcher Takahide Kiuchi said the accelerated interest rate is the biggest reason for the yen's weakness. As the gap between the yen and dollar has widened, the trend of Japanese households reallocating their financial assets and selling the yen has caught the attention of the market.
Kiuchi estimated that the yen is likely to weaken further to the 140-145 yen per dollar this summer and fall.
What's scary is a sudden move by Japanese households to sell the yen, said Daisuke Karakama, chief market economist at Mizuho Bank.
Since the outbreak of the Russia-Ukraine conflict, the prices of energy and other international commodities have been surging, and the impact of the sharp depreciation of the yen on the Japanese economy has been further amplified.
The sharp fall in the yen puts more pressure on import-dependent companies. Data from the Bank of Japan (BOJ) showed that Japanese corporate prices have risen year-on-year for 13 consecutive months.
According to a media survey, 76 percent of the companies said they could not cope with the yen-dollar exchange rate falling below 125, and 94 percent said they could not deal with the yen-dollar exchange rate falling below 130.
Meanwhile, consumer prices are rising, especially for oil and food-related commodities. Mizuho Research & Technologies estimated that if the yen-dollar exchange rate stays at 130, Japanese households will have to bear an additional burden of about 6 trillion yen (45.99 billion dollars) from the rising prices this year.
In addition, the sharp depreciation of the yen has worsened Japan's current account balance. Japan's current account surplus has been shrinking since August last year and turned into a deficit in December as import prices have been rising, according to Ministry of Finance. The deficit widened to 1.19 trillion yen (9.12 billion dollars) in January.
The BOJ expected corporate price rises to continue and inflation to reach 2 percent after April. BOJ Governor Haruhiko Kuroda pointed out that this was not the demand-expanding inflation the bank was looking for. In the absence of rising incomes, increasing cost inflation squeezes the disposable income of ordinary people, dampens demand rather than stimulating consumption, and is not conducive to economic recovery, he said.
Last month, the International Monetary Fund cut its forecast for Japan's economic growth this year by 0.9 percentage points to 2.4 percent. Mizuho Research & Technologies forecast the economy will shrink at an annualized rate of 2.6 percent in the first quarter this year.
The BOJ stuck to its ultra-loose monetary policy after its meeting on April 28th. Local media reported that given the reality of weak domestic demand and weak recovery, the BOJ has little choice.
Under such circumstances, Japan's economic recovery will bear greater pressure as the Fed speeds up interest rate hike and the gap between the yen and dollar further increases.
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