The Bank for International Settlements has issued a warning against the current trend of yen undervaluation. Its annual report states, “There is clearly something anomalous in the ongoing decline in the external rate of the yen.” This is a warning against complacency prevalent among some company executives and investors, who should be ready for a possible sudden surge in yen value.
The cheap yen is a boon to Japanese exporters. Moreover, individual investors can reap high returns in the yen by investing in foreign currency bond or stock investment trusts.
The main cause of the yen’s decline in value relative to the dollar and euro is Japan’s low interest rates. The Bank of Japan decided Thursday to maintain its key short-term interest rate at 0.5 percent. Behind the BOJ’s hesitation to go ahead with an interest rate hike is continued deflation amid the Japanese economy’s recovery. Japan is not importing inflation; rather the increased import of cheap products from China, Japan’s No. 1 trade partner, is pushing down domestic prices.
The core nationwide consumer price index, which excludes fresh food, posted a year-on-year decline for four straight months up to May. Worries by politicians and business leaders about deflation are deterring the BOJ from taking bold action.
The BIS report said, “The underlying problem seems to be too firm a conviction on the part of investors that the yen will not be allowed to strengthen in any significant way.” Yet there is an expectation in the market that the central bank will raise the benchmark rate after the July 29 Upper House election.
It’s dangerous for enterprises to remain content with the cheap yen. They need to make efforts to make their products competitive through increased production efficiency and improved production skills and methods. It is also necessary to make the Japanese economy less reliant on exports. To increase domestic demand, passing the fruit of the economic recovery on to workers will be important.
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