The U.S Dollar hit a fresh six-year high against the Japanese Yen, breaching ¥109 on September 18th, as the Federal Reserve gave more clues to investors that it plans to raise interest rates as the global economy stabilizes.
While a falling yen has been expected by many economists because of the Bank of Japan’s massive quantitative easing (QE) program that began once current Prime Minister Shinzo Abe took power in 2012, the currency’s decline has intensified lately. Between July and September, the yen has plummeted by over 6% – an amount way out of line with that of other regional currencies.
The move warranted a statement by Economics Minster Akira Amari and Finance Minster Taro Aso, who cautioned that sharp declines in the yen should be avoided in the future. However, analysts believe that short-term movements in the yen are out of Japan’s control, heavily depend on the direction of the U.S. dollar, and that the yen will see even more downward pressure.
Emma Lawson, a senior currency strategist at the National Australia Bank, says that the yen has also been affected by poor economic and trade data, as well as expectations than the Bank of Japan will use more stimulus and further loosen their monetary policy in an attempt to support the economy.
“The yen is an under-performer due to the increased risk of more QQE (quantitative and qualitative easing) from the Bank of Japan, the relative under-performance of the economy and the structural deterioration in the external accounts”, said Lawson.
A weak currency is in general, a good thing for an export reliant economy such as Japan; however, the devaluation of the yen has not boosted exports in a significant way. In July, exports rose for the first time in three months, but it’s not clear if this momentum will continue and Japanese businesses have been slow to expand.
During the second quarter, the Japanese economy contracted by the largest amount since the 2011 tsunami and nuclear disaster, falling by an annualized 6.8% as business and property investment declined. By comparison, the United States’ economy expanded by 4.2% in the second quarter. The Eurozone’s GDP grew by 0.2% – a tepid pace, but not a number anywhere near as troubling as Japan’s.
As other large economies enter a recovery stage and continue to raise interest rates, it seems inevitable that the yen will continue to depreciate as long as Japan cannot find a way to spur growth. The question is one that the Bank of Japan is concerned about: to what extent?