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Currency Plunge Is Giving Japan Another Shot at Reflation

·4 min read
Currency Plunge Is Giving Japan Another Shot at Reflation

(Bloomberg) -- More often than not, a crumbling currency is a sign of deep economic malaise -- like the euro’s swoon in 2014 or the pound’s post-Brexit-vote meltdown in 2016. For Japan in 2022, some see it as the best shot at recovery.

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The yen has tumbled to a two-decade low against the dollar, caught in the crossfire between the two wildly different monetary policy regimes in Japan and the US. The Bank of Japan is pinning interest rates to zero in a bid to boost a sputtering economy and spur price growth, while the Federal Reserve is hiking furiously to beat back raging inflation.

Still, the reaction of senior Japanese policy makers to the renewed yen slide Tuesday suggests they also see a plus side. That’s because the cost-push inflation the weaker yen is amplifying likely offers Japan its best chance to secure stable inflation in years.

“A cheaper yen is negative for household budgets, but looking at Japan’s economy as a whole, its positive impact is bigger,” said Masamichi Adachi, economist at UBS Securities.

Japan’s Inflation Tipping Point Inches Closer as Prices Rise

A weaker currency hurts households and importers, but it boosts the overseas profits of Japan’s biggest global names. Down the line, a cheaper yen would also help restore a once-thriving tourism industry that was a key driver of its regional economies.

BOJ Governor Haruhiko Kuroda said in parliament that he wants to leverage the momentum to create a “virtuous cycle in which prices rise moderately while corporate profits, employment and wages improve.”

At stake is the health of the world’s third-largest economy. Get it right and policymakers can help kickstart a much-needed engine of growth in Asia. Get it wrong and they risk a disorderly collapse in a major currency which would send the BOJ scrambling to adjust policy on the fly and Japan hurtling toward another recession.

“The benefits must be used skillfully. Exporters need to make meaningful investments in production facilities and human resources, while structural reforms must also take place,” said UBS’s Adachi.

A Trader’s Guide to Japanese Policy Makers’ Language on the Yen

Chief Cabinet Secretary Hirokazu Matsuno also said the yen had good as well as bad implications for the economy as he reiterated the government’s view that it is watching foreign exchange markets with a sense of urgency.

His comments and the recent language used by senior Japanese officials appeared less forthright than the warnings issued by the finance ministry at the end of April. That’s when the BOJ doubled down on its easy monetary policy as yields threatened to rise above its tolerated level and the yen saw a faster pace of depreciation.

After more than a month to get used to the sharply lower yen levels -- it has dropped more than 13% this year against the dollar -- and to assess the likely difficulty of successfully intervening to prop up the currency, the government looks set to sit tight for now.

“The rhetoric hasn’t strengthened over the yen’s drop this time. That’s partly because the economy is on the mend,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “After virus curbs were lifted, consumption is rebounding and wages are showing moderate gains.”

“Still, I don’t think everything will turn out like the BOJ envisions. Consumers are becoming sensitive to price hikes and if that continues for a while, that will drag on household spending,” she added.

“It’s not that Japan benefits from a weaker yen, it’s the stock market that benefits from a weaker yen,” said Amir Anvarzadeh, strategist at Asymmetric Advisors Pte in Singapore. “The reality of it is a weaker yen is crippling for the households, for the smaller companies, for retailers.”

The danger is a lot is out of the control of Japanese officials. The weaker yen is as much to do with the pace of US interest rate hikes as it is with the BOJ standing pat. Think 3% on benchmark Treasuries versus just 0.25% in Japan.

That makes it not just a Japanese story, but an American one.

“Governor Kuroda has made it very clear that the bank’s ultra-easy policy is here to stay for some time and until we see evidence of a sustained rise in wages,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. “This means dollar-yen remains at the mercy of 10-year Treasury yields, the resilience of the US economy.”

(Updates yen decline in 11th paragraph.)

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