Home Japanese values EDITORIAL: Flexible Policy Responses Needed to Mitigate Damage from Falling Yen

EDITORIAL: Flexible Policy Responses Needed to Mitigate Damage from Falling Yen


The yen has weakened sharply in recent weeks and broke above 126 yen to the dollar for the first time in about 20 years.

The yen’s rapid fall was driven by a confluence of factors, including the economic recovery from the damage caused by the COVID-19 pandemic in some parts of the world and the huge repercussions of 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 provide flexible policy responses to the situation in order to minimize the economic damage caused by the weakening yen.

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

This is happening at a time when the prices of energy, food and raw materials on world markets are rising. The rise in the prices of these products, which Japan needs to import in large quantities, inevitably amplifies the inflationary effects of the fall in the yen.

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

But he admitted that a fall in the value of the yen is now less likely to boost Japanese exports than in the past, as many major Japanese manufacturers have moved production overseas.

On the other hand, sharp increases in the prices of basic necessities without adequate wage increases have hurt household finances. The economic impacts of the yen falling against the dollar by more than 10 yen in about a month should not be taken lightly. Careful assessments of what is happening are in order.

The yen’s fall this time around was triggered by a more pronounced difference between Japanese and US monetary policies. While the US Federal Reserve has decided to raise interest rates to curb inflation, the BOJ is ready to continue its aggressive monetary expansion.

Unlike the US economy, which is eyeing a robust rebound in demand, the Japanese economy is still struggling to recover from the pandemic-induced slump, with wage growth remaining sluggish.

Soaring energy prices threaten to weaken the Japanese economy even as it begins to recover. A BOJ business climate survey last month showed declining confidence among Japanese businesses. The central bank has good reason to maintain its ultra-loose monetary policy, at least for now.

Given the bleak economic outlook, however, it is also important to keep the Japanese currency in balance. The delicacy of the current economic situation makes it all the more important for policy makers to be careful in their words to avoid their words adversely affecting the currency market.

When there are concerns about the risk of speculators dictating the currency trend, key decision makers need to send an appropriate message to the market.

As it keeps monetary spigots wide open, the BOJ should explore ways to prevent excessive exchange rate fluctuations as much as possible with available policy tools, including adjustments to its approach to interest rate controls.

At its board meeting later this month, the BOJ will discuss the upcoming outlook for economic activity and prices, the central bank’s quarterly report on the country’s economic health.

BOJ board members should carefully assess the effects of key factors, such as the situation in Ukraine, the Fed’s monetary tightening measures and the fall in the yen, 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 Japan faces. We are witnessing the emergence of various factors that could reshape the global economy in the medium and long term.

In addition to the fierce and bitter rivalry between the United States and China, there are growing divisions between nations, including stark differences in attitude towards Russia. Inflation has started to soar in the United States and Europe, where there were fears some time ago of prolonged economic stagnation.

The growing global trend towards a carbon-free future also demands special attention.

Japanese policymakers should be fully aware that all of these factors are straining their economic management.

–Asahi Shimbun, April 15