Financial markets/economy

Falling yen against the dollar: what are the consequences and what does Japan plan to do about it?

Posted by MoneyController on 07.05.2024

The yen has lost a lot of ground against the dollar and it is possible that the Japanese government has intervened and will intervene again to remedy any further fall in value.

The Japanese currency's downward trend

The yen has embarked on a trend for the Japanese currency to be worth less and less against the dollar. Although it has rebounded in recent hours (a dollar had come to be worth 160 yen), from the beginning of the year to date, the unit value of a dollar has gone from just over 140 yen to the current 154. As Alessandro Lubello writes in ‘Internazionale’, just against the dollar, the Japanese currency has lost 11% since the beginning of this year and a third of its value since 2021.

Tokyo's possible currency buyback

As Lubello writes in the magazine ‘Internazionale’, which takes up the considerations of an article published by the ‘Financial Times’ in this regard, behind the rebound of the currency there could be a yen buyback wanted by the Japanese government. According to a post on X by Brad Setser, a US economist at the Council on foreign relations (also mentioned by Lubello), Japan has therefore bought large quantities of yen using quantities of foreign currencies in its possession and bought them at a more favourable time for the exchange rate.

The different monetary policies of the Federal Reserve and the Bank of Japan

One of the reasons for the yen's downward trajectory is the difference between the monetary policies of the US and Japan: the Federal Reserve has raised interest rates substantially, whereas the Bank of Japan has limited itself to raising them just above 0% (between 0% and 0.1%). A weak yen, after all, favours exports and tourism but, as is well known, means higher costs for imports. And Japan has a great need for raw materials, from energy to food, of which it is a net importer.

Japan's demographic and economic problems

As Lubello explains, Japan today suffers from economic problems that are difficult to solve by means of economic or monetary support policies: the country is in a demographic crisis, with a shrinking and increasingly elderly population, and continues to have the highest public debt in the world (263% of GDP). Moreover, from the point of view of GDP, Japan risks being overtaken by India in 2025: the International Monetary Fund's forecasts speak of an Indian GDP of just under USD 4,340 billion, against a GDP of Japan standing at USD 4,310 billion; in this case, Japan would drop to fifth world economic power.

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