Why the yen has weakened and what Japan is doing about it

1. What is a yield curve?

It’s a way to show the difference in the reward investors get for choosing to buy short-term versus longer-term debt. Most of the time, they ask for more to lock up their money for longer periods of time, with the greater uncertainty that comes with it. Thus, yield curves generally have an upward slope.

2. What is the difference in Japan?

Normally, market forces determine the yield curve. The BOJ is taking a more hands-on approach. Its yield curve control policy, adopted in 2016, aims to keep 10-year government bond yields around zero with 25 basis points of leeway on either side – as part of its effort to flooding the economy with cheap money in an attempt to revive growth. But its control has come under enormous pressure this year because the Fed began raising interest rates, prompting investors to speculate that Japan would follow, meaning it would allow yield to rise. to augment.

3. What is the BOJ’s response?

The bank intervened in the market, aggressively buying government debt to limit yield. The bank has repeatedly offered to buy an unlimited amount of 10-year Japanese government bonds at fixed yields. It also bought longer-term debt and accelerated its planned purchases on March 30 and its purchase plans for the following three months. The bank has used fixed-rate purchases several times before, including purchases of 1.6 trillion yen ($13 billion) on July 30, 2018, but never for such a long period. As a result, 10-year yields fell to 0.21% on March 30, according to data compiled by Bloomberg.

4. Why is the yen so weak in 2022?

The main reason is the move towards higher interest rates in the United States, making dollar-denominated assets more attractive to investors looking for higher yields. Kuroda – who rocked markets with a surprise move to negative interest rates in 2016, before settling on yield curve control – continues to say it’s too early to reduce monetary easing and raising rates in Japan, where inflation remains relatively subdued. The different positions contribute to weaken the yen. Other factors include the strength of the US economy and its labor market, while Japan continues to lag its peers in regaining pre-pandemic levels.

5. What does the weak yen mean for the economy?

Historically, Japan has welcomed a weaker yen as it helps exporters, including auto giant Toyota Motor Corp., as they repatriate profits made overseas. Over the past decade, former Prime Minister Shinzo Abe ushered in a period of much weaker yen, much to the applause of the business community. The mood is changing now, as the costs of raw materials and other inputs are rising at the fastest rate in four decades. A significantly weaker yen amplifies this pain. The average household is also feeling the effects of rising import prices ranging from energy to food. With the central bank unlikely to budge, Prime Minister Fumio Kishida is trying to cushion the impact through government spending, such as fuel subsidies.

6. What about Kuroda?

It’s an awkward way to spend the final year of his second five-year term as governor. But he shrugged off any worries about the negative side effects of a weaker yen, sticking to protecting the credibility of his policy framework. Kuroda often points out that the Ministry of Finance, not the BOJ, is in charge of foreign exchange matters. The Japanese currency chief said in March that he had discussed foreign exchange as a major issue with his American counterpart. What happens after Kuroda leaves in April 2023 is another matter. Kishida can choose a successor who adopts a more conventional political line.

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