The yen has weakened sharply in the past several weeks and fallen past the 126 yen per dollar mark for the first time in about 20 years.

The yen’s rapid slide has been driven by a confluence of factors including economic recovery from the damage caused by the COVID-19 pandemic in some parts of the world and huge repercussions from Russia’s invasion of Ukraine on the world economy.

But drastic changes in exchange rates are not desirable.

The government and the Bank of Japan need to make flexible policy responses to the situation to minimize the economic damage from the yen’s weakening.

A weaker yen makes Japanese exports more competitive in international markets and pushes up the yen values of profits from overseas Japanese investments. But a softer currency also drives up the yen prices of Japanese imports.

This is occurring at a time when prices of energy, food and raw materials in global markets are surging. Higher prices of these products, which Japan needs to import in large volumes, inevitably amplify the inflationary effects of the yen’s decline.

BOJ Governor Haruhiko Kuroda has maintained that a weaker yen will have “beneficial net effects on the Japanese economy as a whole.”

But he has admitted that a drop in the yen’s value is now less likely to ramp up Japanese exports than in the past because many major Japanese manufacturers have shifted production overseas.

On the other hand, steep rises in the prices of daily necessities without adequate wage hikes hurt household finances. The economic impacts of the yen’s downswing against the dollar by more than 10 yen in a month or so should not be taken lightly. Careful evaluations of what is occurring are in order.

The yen’s slide this time around was triggered by a more pronounced difference between Japanese and U.S. monetary policies. While the U.S. Federal Reserve Board has switched to raising interest rates to curb inflation, the BOJ is poised to continue its aggressive monetary expansion.

In contrast to the U.S. economy, which is looking at a robust rebound in demand, the Japanese economy is still struggling to recover from the doldrums due to the pandemic with pay growth remaining sluggish.

Soaring energy prices are threatening to drag down Japan’s economy just as it is beginning to pick up. A BOJ business sentiment survey last month showed a downturn in confidence among Japanese companies. The central bank has good reason to maintain its ultra-loose monetary policy stance, at least for the time being.

Given the murky economic outlook, however, it is also important to keep the Japanese currency on an even keel. The delicateness of the current economic situation makes it all the more important for policymakers to be cautious about what they say to avoid allowing their remarks to affect the currency market in an undesirable manner. 

When there are concerns about the risk of speculators dictating the currency trend, top policymakers should send an appropriate message to the market.

As it keeps the monetary taps wide open, the BOJ should explore ways to prevent excessive fluctuations in exchange rates as much as possible through available policy tools, including adjustments to its approach to controlling interest rates.

At its policy board meeting at the end of this month, the BOJ will discuss the next Outlook for Economic Activity and Prices, the central bank’s quarterly report on the nation’s economic health.

The members of the BOJ policy board should carefully assess the effects of key factors, such as the situation in Ukraine, the Fed’s monetary tightening measures and the yen’s plunge so that they can prepare effective policy options to respond to the rapidly changing global economic landscape.

The currency market trend is not the only challenge confronting Japan. We are witnessing the emergence of diverse factors with the potential to reshape the world economy over the mid- to long term.

In addition to the fierce and bitter rivalry between the United States and China, there are widening divisions among nations, including sharp differences in attitude toward Russia. Inflation has started surging in the United States and Europe, where prolonged economic stagnation was feared a while ago.

Also demanding serious attention is the growing global trend toward a carbon-free future.

Japanese policymakers need to be keenly aware that all these factors are sorely testing their economic stewardship.

--The Asahi Shimbun, April 15