Japan’s trade shifts mean a weak yen is likely here to stay

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With the yen’s value hitting its lowest level in 20 years against the U.S. dollar, market participants, observers and policymakers are keenly watching for hints as to whether the yen’s weakness will be short-lived or a prolonged trend.

Some economists say that this weakness is likely here to stay, as Japan is expected to face a chronic trade deficit, putting further downward pressure on the yen.

“There are various arguments about whether or not the yen has become structurally weak, but I think we need to approach this issue with the assumption that it is a structural problem,” said Daisuke Karakama, chief market economist at Mizuho Bank.

The yen’s value against the U.S. dollar had already dropped about 10% this year when it hit the ¥126 per dollar line last week. On Tuesday, it even breached the ¥128 level.

While widening differences between dovish Japanese and hawkish U.S. monetary policies and growing import costs stemming from the Russia-Ukraine war have accelerated the yen’s fall, Karakama said that Japan’s long-running trade deficits have made the yen structurally weaker.

Amid soaring commodity prices, the country logged a trade deficit for the seventh straight month in February. And increasing red ink means Japanese companies need to sell more yen to acquire dollars to pay for imports, thereby putting downward pressure on the yen.

The currency has been known as a safe haven asset, meaning investors would normally purchase the yen when major shocks occur. Even when Japan was hit by the March 11 earthquake and tsunami in 2011, the yen rallied.

Some economists say that the yen’s recent weakness is likely here to stay, as Japan is expected to face a chronic trade deficit, putting further downward pressure on the currency. | AFP-JIJI

The yen’s solid status has mainly been backed by the fact that Japan has been the world’s largest net creditor and enjoyed massive current account surpluses thanks to a steady flow of income from overseas, including returns on investments.

However, due to the structural change in Japan’s trade balance, concerns are growing that the country may even post an annual current account deficit. Because of the increasing red ink in the trade arena, Japan posted a current account deficit in December and January. Although February saw a ¥1.64 trillion current account surplus, the figure was down by 42.5% year on year.

Since import costs will likely remain high for a while, some economists say that current account deficits may become a chronic issue for Japan. The last time the nation recorded an annual current account deficit was 1980, following the 1979 oil crisis, according to a Finance Ministry official.

Karakama said the shift in the trade balance is not something that has only just occurred. Following the country’s first annual trade deficit in more than three decades in 2011, Japan’s trade balance for the year turned red six more times through 2021.

The change has been accelerated by surging oil and other commodity prices linked to the Russia-Ukraine war and the pandemic, as well as moves toward carbon neutrality.

“Decarbonization now seems irreversible, and it is also quite certain that the world economy will have to go on without Russia, which will keep resource prices high. So, I think Japan’s trade deficit is destined to deteriorate further,” said Karakama.

“That’s why we need to accept that a trend of a weak yen is expected to persist.”

Bank of Japan Gov. Haruhiko Kuroda attends a news conference in Tokyo on Jan. 21, 2020. Kuroda has said that the yen's recent moves are “quite rapid” and could hurt businesses. | REUTERS
Bank of Japan Gov. Haruhiko Kuroda attends a news conference in Tokyo on Jan. 21, 2020. Kuroda has said that the yen’s recent moves are “quite rapid” and could hurt businesses. | REUTERS

Kentaro Matsuda, a researcher at the Japan Research Institute, also sees a possibility of a structural change in the strength of the currency.

Market participants are already expecting rate hikes by the Federal Reserve, so the downward pressure stemming from the divergence between Japanese and American monetary policy will likely diminish in the second half of this year, Matsuda said.

Yet because of the shift in the trade balance, that probably won’t give the yen enough of a boost to swing it back to the ¥110-to-¥115 level, he added.

“The diminished upward pressure is certainly a structural change, so I think it would not be strange for the weak-yen trend to be prolonged,” Matsuda said.

If a weak yen is to persist, that raises the question: Will the Bank of Japan make moves to counter the trend?

BOJ Gov. Haruhiko Kuroda has repeatedly stressed that a weak yen is a positive for the overall Japanese economy, saying that the central bank will continue its ultraloose monetary policy.

Yet top government officials have started to express concerns over the U.S. dollar-yen rate, and Kuroda told a parliamentary committee on Monday that the yen’s recent moves are “quite rapid” and could hurt businesses.

Finance Minister Shunichi Suzuki said on Tuesday that “rapid moves are not desirable.”

“We will closely communicate with the U.S. currency authorities to appropriately deal with this issue.”

Although Kuroda appears to be changing his tone, economists say that the BOJ does not have a lot of options.

For instance, it’s unlikely that the BOJ will follow the Fed’s rate hikes, since increasing interest rates could severely impact Japan’s debt-ridden economy. The BOJ has been purchasing massive amounts of Japanese government bonds to keep interest rates low, which has lowered borrowing costs for the government.

But under current circumstances, even if the BOJ takes some minor steps, it’s questionable whether they will be effective in stopping the trend of a weak yen, Matsuda said.

Information from Kyodo added

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