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Since the beginning of March, the value of the yen has plummeted against the dollar, the euro and the British pound. Bloomberg economy reporter Yuko Takeo joins Deep Dive to explain why.

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Transcript

Note: Deep Dive is made to be listened to, and we recommend this transcript be used as an accompaniment to the episode. This transcript has been generated using a combination of speech recognition software and human transcription, and may contain errors. Please check its accuracy against the episode.

Oscar Boyd  00:09

Hello and welcome to Deep Dive. From The Japan Times, I’m Oscar Boyd. 

There’s an account that I follow on Instagram called Hokkaido Backcountry Club. And they normally post videos of themselves skiing and boarding all around northern Japan. But earlier this week, I saw them post something that was quite out of character. It was a graph showing the value of the yen and how it has changed over the last few years. Underneath, the message read, and here I’m paraphrasing slightly: “Attention guests, we are confident that the borders will be open by next winter. This is the time to book your trip. The yen has never been weaker, and your dollar will never go further.” And while it’s not strictly true that the yen has never been weaker, it is currently at a 20-year low and still seems to be falling. 

This week on Deep Dive Bloomberg economy reporter Yuko Takeo explains why.

Oscar Boyd  01:06

Yuko Takeo, welcome to the show. Thank you so much for joining me today. 

Yuko Takeo  01:10

Thank you for having me. 

Oscar Boyd  01:11

So at the time of recording — it’s Monday afternoon as we’re speaking now — the yen has fallen in value to ¥126 to the dollar. How significant is this? 

Yuko Takeo  01:21

Yeah. So, like you said, we’ve hit ¥126 to the dollar. And that’s the weakest level it’s been in about 20 years. And the key thing is that it’s happened pretty fast. In the space of basically six weeks, it’s gone from ¥115 yen to ¥125. So it suddenly weakened 10%. And what that means in real world terms is that say you had ¥10,000 and you were trying to exchange that into dollars six weeks ago. Your ¥10,000 would have got you $87. But now if I went to an exchange and exchanged it, it would be roughly $79. So for the exact same amount, ¥10,000, you’d only get $79. 

Oscar Boyd  02:05

So anyone hoping to change yen into dollars has seen the value of that decline significantly over the past few weeks. And I suppose vice versa as well. If you’re moving dollars into yen, you’re now going to get a lot more yen for your dollars. 

Yuko Takeo  02:17

Exactly. 

Oscar Boyd  02:18

But it’s not just the dollar the yen has fallen in value against is it? It’s also weakened against several other major currencies, right? 

Yuko Takeo  02:24

Yeah, same with the euro, same with the pound. In early March, it was about ¥151 to the pound. It’s now ¥165. Same for the euro, it was ¥125 to the euro in early March, now it’s ¥137. So you get much less bang for your yen, essentially. 

Oscar Boyd  02:44

And if we look back in time a little bit just to give some context, how has the value of the yen changed over the past few years? 

Yuko Takeo  02:50

So if you look back a decade ago, it was around ¥80 to the dollar, so ¥45 less than it is now. The weakening of the yen started about a decade ago with Abenomics. I’m sure people have heard of the various policies to do with former Prime Minister Shinzo Abe, those various policies have weakened the yen massively. About a year ago it was ¥108, so it has weakened quite a bit from that level. 

Oscar Boyd  03:19

So from ¥108 down to ¥126. If Abenomics helped start a longer term depreciation in the value of the yen, what’s caused it to suddenly lose so much of its value over the last few weeks? 

Yuko Takeo  03:33

So it’s basically a tale of two central banks. It’s the difference between where the US is going and where the Japanese central bank is going. So if I could explain first what’s been happening in the US. They’ve been experiencing huge amounts of inflation. Right now, the US has seen prices rise by 8.5% year over year. And that is obviously problematic. If you’re seeing your basic food prices rise that fast, then you can imagine the effect on your daily life. If your bread or your rice or your sandwich starts rising in price at that pace, that’s problematic. And what the central bank in the US has done to try and slow down that rapid rise in prices of absolutely everything is to raise interest rates. And this whole weakening of the yen started because the Federal Reserve, that’s the US central bank, started its rate hike process in March. 

Oscar Boyd  04:33

And those interest rate hikes are scheduled to take place over the next two or so years in the US, with the Federal Reserve planning to increase the interest rate every couple of months. 

Yuko Takeo  04:41

Yeah, exactly. 

Oscar Boyd  04:43

You said it was the tale of two banks. If that’s what’s happening at the Federal Reserve, what’s happening here at the Bank of Japan?

Yuko Takeo  04:50

Right, so on the other end of the story, if you look to Japan, I mentioned how inflation in the US is so much higher — it’s 8.5% in the US. But in Japan, the latest core CPI reading, that’s the benchmark inflation rate in Japan, is only 0.6%. Now in April, it’s expected to temporarily go up to 2%. But even that is still extremely low compared to the US. So for the Bank of Japan, their stance is that inflation isn’t at a level where they need to raise interest rates yet. They can’t pivot policy the way the Federal Reserve in the US has done, because inflation isn’t as problematic yet. Obviously, we’re still in a pandemic, and the economy needs support from the central bank. So they’ve said, ‘Okay, inflation isn’t that bad yet. And we’re going to continue with our support policy for now.’ 

Oscar Boyd  05:46

So they’re effectively keeping the interest rate low here, which means it’s cheaper to borrow money. And this offers support to Japan’s economy, which hasn’t yet recovered from all of the effects of the pandemic and everything else that’s going on in the world at the moment. 

Yuko Takeo  06:00

Yeah, exactly. 

Oscar Boyd  06:01

Okay, so taken together, why has the relatively high interest rate of the Federal Reserve, and the low interest rate of the Bank of Japan led to the value of the yen dropping so much against the dollar? 

Yuko Takeo  06:13

Right. So this means that interest rates in the US are a lot higher than in Japan. Think of it in terms of what will happen to the money that is sitting in your bank account. So my current SMBC bank account in Japan has an interest rate of 0.02%.  

Oscar Boyd  06:32

Congratulations. 

Yuko Takeo  06:33

Thank you very much. But in the US, an equivalent bank account would start to have much higher returns on your deposits. So this is simplifying it a little bit, but investors around the world are thinking, if I put my money in assets in the US, your bank account in the US, you’ll get more returns. So they’re taking money out of Japan. They’re selling the yen, buying dollars, in order to have more money in the US where they get better returns. That’s why the yen, broadly speaking, is weakening. 

Oscar Boyd  07:07

So there’s just less demand for the yen as a currency internationally and more demand relatively for the dollar. So the yen gets cheaper and the dollar gets more expensive. 

Yuko Takeo  07:16

Exactly.

Oscar Boyd  07:17

And this is also happening with other currencies as well, I assume because, say the Bank of England is also raising interest rates, therefore the yen also declines against the pound as well. 

Yuko Takeo  07:26

Yeah, exactly. The Bank of England actually was the first to raise interest rates among the major central banks. So they went ahead even before the Federal Reserve in raising their interest rates. That meant the yen also weakened against the pound in exactly the same mechanism.

Oscar Boyd  07:42

I’ve heard of the yen being referred to as a safe haven currency, which means that normally when crises hit the yen actually increases in value. At the moment, the world seems to be bouncing from crisis to crisis. We’ve got the Russia-Ukraine war, we have the pandemic and ongoing disruptions to supply chains as well. If the whole safe haven reputation is true, why haven’t we seen the yen increase in value this time round? 

Yuko Takeo  08:12

So you’re right. Historically, even with March 11, 2011 — the big earthquake — the yen actually strengthened. And same with the great financial crisis around 2008, the yen actually strengthened. And it’s historically been called a safe haven. But what’s different this time around is that everyone knows that the US Federal Reserve will keep raising interest rates, while it looks for now that the Bank of Japan won’t change their stance and that interest rates will remain low. So the basic picture is that the yen has no reason to strengthen. Another big reason is that Japan imports the majority of its energy. And given the global rise in commodity prices, it needs more dollars. It needs to buy dollars and sell the yen in order to buy all that energy. So those two main things mean that there’s a different scenario here. 

Oscar Boyd  09:07

So does that mean that as long as the price of oil and other fossil fuels remain high around the world, there will continue to be downward pressure on the value of the yen because Japan imports so much of its energy and it has to do so using the dollar as a currency?

Yuko Takeo  09:22

Yeah, exactly. In addition to that, Japan obviously can’t have its nuclear power plants running now. So it’s a sort of double whammy situation for Japan.

Oscar Boyd  09:44

Over the past few weeks, the Bank of Japan governor Haruhiko Kuroda has said on several different occasions that Japan’s economy actually benefits from a weak yen. Could you explain the reasoning behind that? 

Yuko Takeo  09:56

Sure, so generally speaking, Japan is an export driven economy. Its domestic economy is quite large as well, but it exports a lot of goods, chiefly speaking cars. So your Toyotas and your Hondas of Japan benefit from a weaker yen because they can sell their products abroad. And they sell it in dollars, right? Once they repatriate that into yen, if the yen is weaker, they have more of an income, more of a profit. So that’s the basic reason why a weaker yen is positive. Another reason pre-pandemic was that Japan used to have a lot more tourists. In the years from 2011 to 2018, the number of tourists in Japan went up by about 500%, and a big reason was the weaker yen. People coming to Japan had more spending power when the yen was weaker. But obviously now Japan does not have that positive. 

Oscar Boyd  10:50

Yes, certainly while the borders remain closed. If it’s not getting that tourism benefit, though, is the rest of the economy benefiting from the weak yen at all? 

Yuko Takeo  10:57

So the picture is more murky right now. Yes, some big companies and big exporters are still benefiting from the weaker yen because they’re still exporting products. But the problem now is that most companies still have to import raw materials. And that cost is rising massively because of all of the commodity prices rising. The input costs for companies are rising at the fastest pace in about 40 years. That means that in addition to the commodity cost rise, the weaker yen is damaging companies’ ability to buy things to make with. So it’s not a clear cut picture of just because you are still exporting a lot, the weaker yen is positive. 

Oscar Boyd  11:42

And I imagine then there must be some companies who are doing far better than others with this arrangement. If you’re a large company selling goods overseas, like Toyota, then there might be some positives from that weaker yen. But if you’re a company that mostly sells things domestically, and your input costs have gone up, you’re going to be seeing far fewer positives from that weak yen. 

Yuko Takeo  12:02

Yeah, so it does kind of link to how big of an operation you are as a business as well. If you are a global firm, like Toyota, you have different production bases, different businesses, operating all over the world. So there’s always room to maneuver within your business. But if you’re a small company that has no choice but to have one avenue of imports and one avenue of exports, for example, then you’re basically stuck. You can’t dodge the rising prices, wherever you go.

Oscar Boyd  12:33

Recently, I saw a poll from Reuters that said now almost three quarters of companies are starting to see negative impacts from the weakening yen. What are some of the specific ways in which companies and businesses here are being impacted? 

Yuko Takeo  12:47

A lot of it does come back to the raw material price rise. For example, the Steel Makers Association, the head of that group has come out and said that the weak yen has been damaging the production and the business  because of the rising fuel prices. It takes a lot of energy to create steel, so for them that is a negative. Various food makers also, such as anyone who needs to import grain. What’s happened is the input costs for companies have risen quite a bit. And historically, companies had toughed it out by not passing on that cost to the final price of products so that the consumers didn’t notice. But it’s getting so bad that they are being pressed to a place where they have to pass it on to the final product price. 

Oscar Boyd  13:40

It seems like we have two distinct but intimately linked issues here. The rising commodity prices and the falling value of the yen. Can we say which is having more of an impact on companies in Japan and their input costs? Or is it too hard to untangle? 

Yuko Takeo  13:57

Generally speaking, I think most companies are suffering more from the actual commodity price rise, the input costs rise. But the yen definitely doesn’t help in the overall picture when you’re already suffering from this rise in raw material commodity prices. To have that extra push of damage from the yen really doesn’t help for a lot of companies.

Oscar Boyd  14:21

And now it’s got to the point where some of them are passing these increased costs on to consumers. So what effects are we seeing from the weak yen on consumers in Japan?

Yuko Takeo  14:32

Already we have been seeing fuel prices rise, right? In my case, my electricity bill and gas bills have already risen quite a bit this year. And I’m sure it’s the same across Japan. And that is a result partly because of the commodity price rise and the war in Ukraine and supply constraints with countries and companies not being able to buy from Russia. But the weaker yen means that the prices are even more expensive. So that’s one side of it, the direct fuel and commodity prices. But in addition to that, because energy costs are rising, the price of everything is also rising. So we’ve seen prices rise for everything from flour to Starbucks coffees. Soy sauce has also risen. I think the list goes on for specific products, everything from Karage at Lawson to Cup Noodles. So for the consumer, it’s a double rise in prices of fuel, energy, and a range of different products in addition to that.

Oscar Boyd  15:38

If consumers and companies are facing this double whammy of price rises, how is it that Japan’s inflation rate is still so low? Because it sounds like these are the exact conditions being faced by countries and consumers and companies around the rest of the world where inflation is really picking up. 

 

Yuko Takeo  15:57

It sort of goes back to the Bank of Japan, having tried to get prices to rise for so long. But the problem in Japan is that it’s had deflation for a really long time. It’s had prices stuck at a low level for three decades, ever since the bubble burst. So that has created this mindset within firms that if you raise prices, you’ll lose customers. Customers aren’t used to prices rising, so the moment you raise the price of something, then customers are going to go race to your competitors. So firms have been afraid that the moment they do that, they’ll lose customers. So that mindset has become entrenched within the Japanese economy basically, the idea that prices won’t rise, and customers will react in a certain way if they do. That’s why even though we’re seeing some pockets of prices rising, overall that mentality is still there. 

Oscar Boyd  17:03

So what are firms doing then when they’ve got these increased costs, but there’s still this pressure not to actually raise prices? Are they just swallowing those costs themselves and taking lower profits, for example? 

Yuko Takeo  17:15

Yeah, that’s essentially what’s happening. They’re just taking on that rise. And it’s not just customer-facing companies. At a lot of the smaller companies that supply larger companies, there’s this ingrained sense within that chain that if you raise your price, you will lose your customer. So even if your customer is a firm, not a consumer, there’s that sense that’s been entrenched within the Japanese economy that you can’t raise prices. 

Oscar Boyd  17:49

Another way the falling value of the yen is going to affect residents of Japan is that it will make it more expensive for people to send remittances from Japan overseas, and also people who are hoping to travel abroad and need to convert yen into other currencies, they will also face steeper prices to do so. 

Yuko Takeo  18:06

Exactly. I think a lot of people are thinking about going back home outside Japan now that there’s no quarantine for a lot of countries when you come back to Japan. I’m sure people have already realized this, but the weaker yen means that your yen back in Japan that you’ve earned, it’s going to get you far fewer pounds or dollars or euros or any other currency that the yen has weakened against. And, if you have a bank account in the UK or the US and you want to exchange your yen into dollars, or pounds in those accounts abroad, that means that your salary in yen is going to be worth less.

Oscar Boyd  19:01

As you mentioned earlier on, the decline of the yen has been incredibly rapid over the past few weeks. How is its value expected to change from now on? Do we think it will stabilize? Will we see it get even weaker? Or might it start to recover? 

Yuko Takeo  19:16

That’s kind of the trillion yen question I guess. Given that the Fed is going to keep on raising rates, the structure is that if the Bank of Japan stays where it is and says we are not going to raise rates and the Federal Reserve keeps on raising rates, the pressure is going to be in the direction of the yen weakening. Now, most market participants already see the Fed raising rates for the rest of the year, so that is priced in already. But if that pace keeps on rising, or the Bank of Japan firmly keeps its stance of ‘no we’re not going to change our stance,’ then that would fuel even more yen weakness. Some people predict that it might even reach 130 this week, depending on the IMF spring meetings that are happening this week. The Finance Minister is probably going to speak again a few times this week, potentially the Governor of the Bank of Japan could speak as well. So it wouldn’t be surprising for the yen to hit 130, even this week, depending on how different comments go. It really is dependent on what the Bank of Japan does, and what the government does, ultimately. 

Oscar Boyd  20:31

And what might cause the Bank of Japan to change its stance? 

Yuko Takeo  20:35

The key here is what happens to prices in Japan? What happens to inflation in Japan? The Bank of Japan’s mandate is to maintain stable prices. That’s their key goal as an organization. So if it looks like, even by the Bank of Japan’s own admission, that the 2% target of inflation is going to be met stabley, and it’s not a temporary thing, then by their own policies they have to change their stance. So it’s dependent on how the Bank of Japan sees inflation. 

Oscar Boyd  21:10

Is the government aligned with the Bank of Japan on this low-interest stance? Or are we seeing some dialogue between the two or even some pressure from the government for the Bank of Japan to take some action here? 

Yuko Takeo  21:22

The thing with the Bank of Japan and the government is that nominally, the Bank of Japan is independent as an entity. It’s not supposed to be influenced by the government. But the reality of it is, of course, slightly different. And the Bank of Japan and the government has had something since 2013, a joint statement saying that they would cooperate in order to get that 2% stable inflation target and growth. That said, on the yen, there’s a slightly different nuance to how it impacts the Bank of Japan and how it impacts the government. For the government. It’s more obvious that the weaker the yen gets, they could come under more political pressure from voters because the average person will be feeling that rise. They’re already feeling the rising fuel costs, electricity costs, gas costs, and with the yen weakening, that means more companies may be forced to raise consumer product prices. So with the yen weakening, the government may be put under more pressure to try and do something to strengthen the yen. And the Bank of Japan, their mandate is not currencies, their mandate is inflation and prices. So it isn’t under their remit to control foreign exchange rates. That’s actually part of the Ministry of Finance’s job. If Japan was to intervene in foreign exchange rate markets, that would be via the Ministry of Finance. That’s why the Bank of Japan’s Governor keeps on saying it isn’t the Bank of Japan’s remit. It’s up to the government, it’s up to the Ministry of Finance what they do in terms of the yen. 

Oscar Boyd  23:03

So tell me about that. If the Ministry of Finance were to intervene to try and strengthen the value of the yen, how would they actually go about doing that? 

Yuko Takeo  23:11

They could essentially just buy the yen, buy lots and lots of yen, in order to make it stronger. The orders would come from the Ministry of Finance, and the Bank of Japan would be the one to execute that order, whether it’s selling or buying the yen. But the problem with that is that there’s always another side of this. If Japan intervenes to strengthen the yen without discussing it at all with the US, the US would probably find that problematic. So usually, when something like this happens, Japan will probably try to talk about it with other major economies and have some kind of assurance that it would be alright for them to intervene in the market. The last time this happened was right after the March earthquake, so 2011, and they intervened in the direction of weakening the yen. Back then there was a global consensus that this is a one-off, major crisis, and so Japan can intervene. It’s not a one-sided thing that Japan can just decide on its own. 

Oscar Boyd  24:15

Minus the government intervening. What are the scenarios where we might see the yen begin to strengthen again against the dollar?

Yuko Takeo  24:23

That would be the Bank of Japan actually changing its policy, or the Fed moving in a direction that isn’t as fast as we’d thought for raising the interest rates. Then that would work in the direction of the yen strengthening. 

Oscar Boyd  24:41

So if the Federal Reserve showed signs that it didn’t think inflation was going to be as bad as they originally predicted, and that meant they could slow down the rise in interest rates or put a pause on them altogether, that would likely lead to the yen strengthening against the dollar? 

Yuko Takeo  24:57

Yeah, even before the Fed actually said something. If the data shows that inflation in the US is slowing down, then that would invite people thinking ahead to predict that the Fed now also sees that inflation is slowing down. So maybe they won’t raise interest rates as fast as we were expecting. 

Oscar Boyd  25:15

Is there a point that the yen could get to against the dollar — if it continues to weaken -— where things would become really problematic for companies in Japan? Where the government would feel like it really had to step in to do something to strengthen the value of the yen? 

Yuko Takeo  25:30

It’s difficult to give a precise point and say ‘it’s this yen.’ But I feel that if it keeps on weakening, say beyond 130, beyond 135, that would start putting more and more pressure on the government to act. Especially because there’s the summer elections coming up and voters are thinking, okay, do I want to vote for a government who stands by and does nothing as the price of your daily onigiri keeps rising or the price of your electricity bill keeps rising? If the government stands by and does nothing about this, what will voters think? It also depends on whether the government steps in and does something to support households. That’s already been debated a lot. Already with fuel prices they brought in these subsidies to limit the amount of gasoline prices rising. So the question is whether they might go in and do more if other things start rising more to try and avoid that hit on household spending.

Oscar Boyd  26:39

Yuko, thank you very much for joining me today. 

Yuko Takeo  26:41

Thank you.

Oscar Boyd  26:50

That was Yuko Takeo, an Economy Reporter at Bloomberg, and I’ve linked some of her articles on how and why the value of the yen has changed in the show notes.

Since recording this episode on Monday, the yen has continued to decline in value, and as of Wednesday morning Japan Time, stood at ¥129 to the dollar. 

Also in The Japan Times this week. According to the Ministry of Internal Affairs and Communications, Japan’s population dropped by 640,000 in 2021, to just over 125.5 million people, the biggest fall on record. Japan’s population has consistently declined since 2008, when it peaked at 128 million. That story and all the latest news from Japan at japantimes.co.jp

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