Currency News: Japan is Thrilled their Currency is Falling
Currency News
Why Japan’s Yen is Weakening and How the U.S. Impacts its Future
Since 1992, Japan has been fighting deflation, after their country went through a recession due to a stock market and real estate bubble burst, and hasn’t been able to change its circumstances. Prime Minister of Japan, Shinzo Abe, has tried to remove the country from the deflationary trap by implementing Abenomics, a monetary easing policy described by his beliefs. Abenomics goal is to reach 2% inflation through an increase in spending and consumption. Japanese spending was at a critical level. Low prices continued at a downward spiral and consumers preferred to save their money and buy later when prices would be relatively cheaper. Around $660 billion a year is being printed to inject into the economy to help contribute to the Prime Ministers efforts.
Another target of Abenomics is to reduce the Yen. The Yen has hit its weakest level since February of this year. This would have most other countries anxious, but Japan has been encouraging the fall of their currency. A devaluation in their currency would allow them to compete with other countries like China and Taiwan and increase their exports. China, for example, has been devaluing their currency for years, so that their exports would be more attractive to foreign countries. This has taken much of the businesses spotlight away from Japan, who is highly export reliant to grow their economy. On the positive side, it has also led to an increase in importation costs, which has contributed to the goal of 2% inflation. The Bank of Japan has spent roughly $4 trillion in an act to weaken the currency. It has proven to be only slightly successful as the yen continued to strengthen afterwards. For the first time, the central bank had to carry out an extreme measure, negative interest rates. This would hopefully discourage citizens from saving and stimulate the flow of money.
Since the United States Presidential elections, the yen has weakened by another 17%. President-elect Donald Trump has plans to cut taxes and invest in infrastructure, increasing inflation and the value of the dollar. With the U.S. currency on the rise, other currencies in relation have dropped. Japan’s yen is the third most commonly traded currency and has continued to see decline after decline. Overall the yen has fallen 60% compared to the dollar, reaching a high of 121.37 yen to the dollar on January 31, 2016. After its high, Abenomics kicked in to improve the yen’s situation, bringing it to its strongest value of 99.99 yen to the dollar. Today, the yen has again risen to 117.64 to the dollar showing a slight improvement to the strength of the currency from earlier this year, but close to where it started after the Abenomics program.
With all the money spent to weaken their currency, Japan’s exports have only grown by 9%. So is a devaluation of the yen really worth it? “In Japan, people are concerned more about a return of a strong yen causing deflation than an excessive yen weakening driving up inflation. (CNBC)” It seems as if Japan is content with the path they are currently on and have no intent in changing for the meantime. That is, until it proves to have the opposite effect on their economy. Currently, the dollar is strengthening due to hikes in U.S. interest rates. Since the Yen is fixed to the exchange rate of the U.S., the recent rise in the U.S. currency advances the decrease to the Japanese currency. The pegged yen to the dollar is beneficial for Japan’s exports and influential to U.S. businesses and their stability in long-term planning. There is uncertainty in the markets as President-elect Donald Trump takes power, which could lead to a rise in the yen if he decides to change course, leading to a fall in the dollar. Japan has recently overtaken China as the largest foreign holder of U.S. Treasury’s. This also has influence on the direction of the Yen, whether the U.S. Treasury Yields continue.
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