Japanese Citizens Also "Crush" the Yen

Masato Kanda, the Japanese Vice Minister of Finance for international affairs, mentioned speculation over the cause of the drop in the yen exchange rate. Kanda reminded that Japan's monetary authorities are ready to respond 24 hours a day and 365 days a year to prevent further decline in the yen.

According to the daily The Financial Times, April 30 2024, the BoJ appears to have intervened by pouring the equivalent of 35 billion US dollars into the market. However, the yen exchange rate never strengthened.

"The yen exchange rate may not drop sharply, but it is difficult to recover due to its weakness. The current issue with the decline of the yen is not only caused by the actions of foreign investors and speculators. Japanese citizens also predict that the yen will continue to weaken," said Koji Fukaya from the consulting firm, Market Risk Advisory Co.

Also read: ”Carry Trade” Status Causes Yen Exchange Rate to Drop Drastically

According to Reuters, on Tuesday (April 30, 2024), the thought of the yen's continuous depreciation is occupying the minds of ordinary Japanese citizens. As a result, they are saving in non-yen denominations. The problem is, if they continue to hold yen, they will be burdened with the increasing cost of imports, such as energy, due to the weakening of the yen. Therefore, citizens are securing themselves by holding, among other things, US dollars.

Different benefits

The most fundamental weakness of the yen lies in the difference in the US core interest rate which is now 5.25 percent. This is very far above Japan's core interest rate which is in the range of 0-0.1 percent. This situation encourages players in the foreign exchange (forex) market to borrow funds in yen with low interest and save them in US dollars with higher interest. This is called a carry trade in the forex market.

If the deposit matures, the profit from the interest rate on savings in US dollars will be high, coupled with the decline in the yen exchange rate against the US dollar. This kind of loan-borrower turnover keeps repeating itself. Therefore, as reported by The Japan Times, whether there is intervention by the BoJ or not, the fate of the yen will indeed weaken.

If the BoJ raises interest rates to be on par with the US, it would be impossible. The Japanese government has a large debt in the form of bonds, so if interest rates are raised, the country's financial burden will increase.

The US dollar versus yen is the most liquid exchange rate on the forex market.

Another issue is that if interest rates are raised, it will burden the Japanese economy due to high costs. Because the Japanese economy is very weak, BoJ has set core interest rates at a negative rate for 17 years.

The BoJ has raised the core interest rate from -0.1 percent to in the range of 0–0.1 percent on March 19 2024. However, this increase does not change the position of the yen in carry trade interest on the forex market.

Other problems occur outside the forex market. Income from investments in US-issued bonds is also much higher than investments in Japanese government-issued bonds which have much lower interest rates. This also encourages investors to sell the Japanese yen.

Very liquid

The fall of the yen also lies in market liquidity. According to Ben Emons, an investment strategy expert from NewEdge Wealth, the US dollar versus yen forex game is the most liquid in the market. In other words, it is very easy for forex players to obtain yen to be borrowed and stored in the form of US dollars. "The US dollar versus yen exchange rate is the most liquid in the forex market," Emons told CNBC on April 29.

Also read: Spending Hundreds of Billions of US Dollars, Japan Failed to Prevent Yen Weakening

Yen pairs that are also popular in the forex market are the Australian dollar, Swiss frank and New Zealand dollar. So, carry trade actions have been very widespread since the US Central Bank (Federal Reserved/Fed) started raising core interest rates on March 16 2022. Since then, the yen exchange rate has fallen 31 percent until May 1 2024 .

Japan's difficulty in preventing the yen's decline is due to the Fed's inability to lower core interest rates. In the US, inflationary pressures remain high and have yet to reach 2 percent. Fed Governor Jerome Powell even stated that high core interest rates in the US seem likely to persist for a relatively long time.

The issue for the US is that inflationary pressures are added to the government's budget deficit, which is equivalent to monetary easing. This adds pressure to inflation in the US. Therefore, Emons said the yen exchange rate could drop to 160 yen per US dollar, including indications that the US is still struggling to lower its core interest rates.

Japanese businessmen are complaining about the decline of the yen. The exchange rate fluctuations are disrupting business planning. Another reason is that import costs will rise. However, the Japanese authorities are currently unable to do anything to maintain yen stability.

The hope is only for speculators to calm down and the yen exchange rate to be around 140 yen per US dollar. BoJ Governor Kazuo Ueda is trying to give the market a perception of the possibility of an interest rate hike. There is some indication that the perception of a potential interest rate increase is expected to halt market speculation. However, Ueda also does not see any significant impact on the market. (REUTERS/AP/AFP)