The dollar has strengthened sharply against the yen recently. Since the beginning of 2022, the yen has weakened by 32% against the dollar and since March by 14%. These are radical changes in the currency market that is generally considered stable. It is now worth one dollar 133.29 yen – the highest rate since February 2002. This may be another sign of the fragile state of the world economy, and a catalyst for further undermining its stability.
Yen weakness is a by-product of monetary policy. While the US Federal Reserve is moving towards a tight and aggressive monetary policy that was unexpected but only a few months ago, the Bank of Japan is adopting one of the most extensive monetary policies in the world today, in addition to continuing the country’s long-standing incentive policy.
Japan is known as a country that has struggled for many years with a lack of growth that is accompanied by a stagnation in prices, and even deflation (price declines, or an increase in the purchasing power of money). The main reasons for this are the fact that the Japanese are very sensitive to rising prices and react sharply to any attempt to raise nostrils, as well as the aging population.
The significant weakening of the yen against the dollar may cause inflation to develop as the prices of imported products rise sharply at the yen level, making it very difficult for the elderly population whose relative weight in the Japanese economy is growing, and living on a fixed-rate pension. In addition, Japan is completely dependent on imports of energy food, which are hardly produced at all on the Asian island, and these two categories have become particularly expensive even in dollar terms in the recent inflationary outbreak. The forceps movement of rising commodity prices along with declining value of Japanese currency is a deadly combination of prices in Japan. Stabilizing the fourth largest economy in the world with a GDP of almost $ 4.87 trillion could be a catalyst for international instability.
In light of the elections to be held in the country next month, pressure from politicians is beginning on the central bank to “do something.” The central bank is now faced with the dilemma of whether to change its long-term policy of zero interest rates or try to influence the wine rate. So far, the bank has contented itself with a “verbal guarantee,” that is, statements designed to strengthen the deteriorating currency. No actual intervention has yet been taken, but such a move could actually send panic and fear of the situation deteriorating. All eyes are on this matter at the meeting of the Bank of Japan on Friday.
Such an intervention could be a marker for a global trend change. In recent years, governments and central banks have done their utmost to weaken local currency to become more competitive in global markets. Here in Israel, we are familiar with the massive purchases of dollars by the central bank in order to weaken the shekel, a policy that Governor Fischer began many years ago, a policy that has remained the same with his successors until recently. An attempt by the Bank of Japan to actually strengthen the local currency in the face of strong inflation could ignite a reverse “currency war” in which each country is actually trying to strengthen its currency in order to maintain local price stability.
The weakness of the yen in particular and other currencies against the dollar poses difficulties for American exporters that are becoming less competitive in the global market. The dollar index is at its highest level since the end of 2002. Microsoft, for example, has already warned that it will post a provision of $ 460 million in the coming quarter for currency losses.
Another danger to the global economy created by too strong a dollar is in emerging markets. These have taken out loans in dollars, and in the face of weak national currencies are having difficulty meeting repayments, precisely at a time when their spending on energy and food is also skyrocketing.
Ultimately, for all these reasons, the continued strengthening of the dollar in general and against the Japanese yen in particular could hurt international trade in a variety of ways and is another factor in undermining the stability of the global economy.
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