Japan Institute for National Fundamentals

　
Recently, the trend of a weak yen continues with the dollar being worth in the 140-yen range. This weak yen has brought about self-deprecating criticism that it has caused an increase in import prices and the “Cheap Japan” when domestic prices are converted into foreign currency. There are also opinions that the Bank of Japan’s low interest rate policy is one of the reasons for the weak yen, and that the policy should be revised or abolished.

Given the realities of the yen’s recent depreciation, however, such criticism and opinions are misguided. Japan should take maximum advantage of the benefits of the yen’s depreciation to break away from deflation and stagnation that have plagued the Japanese economy over three decades.

Contributing to Japan’s economic revival

For companies that import raw materials, a weak yen increases costs, but for exporting companies, it generates increased profits. For Japanese companies that operate globally, it also contributes significantly to increased profits by converting foreign currency-denominated overseas income into yen-denominated income at the time of consolidated accounting.

Due to prolonged deflation so far, consumption and investment, which are among demand items that make up gross domestic product (GDP), have been sluggish. On the other hand, the proportion of exports in GDP has relatively increased, and the degree to which export expansion due to a weak yen contributes to economic growth has increased. In addition, if exports expand, capital investment will also expand, and if profits increase and wages rise, it should contribute to the expansion of consumption. Furthermore, domestic return of manufacturing industry that was hollowed out during the period of a strong yen before Abenomics and inbound tourism is expanding. Therefore, a weak yen contributes to the overall revival of the Japanese economy.

On the other hand, there is criticism that if the yen continues to weaken further, it will not only squeeze the profits of importing companies but also raise prices by price pass-through, increase the burden on consumers, and hinder economic growth. However, the current price hikes, though partly attributable to the weakening yen, are caused primarily by international price increases that have resulted from constraints on grain and energy exports due to events such as the Ukraine war and supply chain disruptions due to the COVID-19 pandemic.

Market intervention possible to counter wild exchange rate fluctuation

There is no need to worry about the yen falling excessively. The currency exchange rate between two countries is mainly determined by the interest rate and inflation rate differentials. The current weak yen is due to the fact that Japan has consistently pursued a low interest rate policy, while the United States has rapidly raised interest rates to cope with rapid inflation. However, there are concerns about the real economy in the United States, and there is a high possibility that it will eventually shift away from the interest rate hike phase. If that happens, it will not be a one-sided decline in the yen against the dollar.

The exchange rate reflects the difference in economic conditions between the two countries and circulates with the economic cycle. If the government judges that rapid fluctuations in the exchange rate are having a negative impact on the real economy, it is likely that intervention to buy yen will be carried out.

In order to revive Japanese economy, it is important to take advantage of the weak yen, link corporate earnings growth to wage hikes, activate consumption, and sustainably achieve the price stability target of 2%. Until then, we must continue to persistently ease monetary policy and avoid tax hikes and fiscal spending cuts that run counter to demand expansion.

Etsuro Honda is a member of the Planning Committee of the Japan Institute for National Fundamentals and a former special adviser to the cabinet. He advised then Prime Minister Shinzo Abe for the success of Abenomics. He also served as Ambassador of Japan to Switzerland and Liechtenstein.