Japan's Economic Contraction Likely to Persist Despite Expected Yen Appreciation

Japan's economy faces continued contraction despite expected yen appreciation, highlighting challenges from global monetary policy divergence and structural issues. Policymakers monitor the situation as the yen hits a 34-year low against the dollar.

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Quadri Adejumo
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Japan's Economic Contraction Likely to Persist Despite Expected Yen Appreciation

Japan's Economic Contraction Likely to Persist Despite Expected Yen Appreciation

Japan's economic contraction is likely to continue despite an expected appreciation of the yen, according to local analysts. The Japanese yen has reached a 34-year low against the U.S. dollar, dropping through 155 per dollar for the first time since 1990, keeping foreign exchange traders on intervention alert.

The yen's depreciation is attributed to the aggressive interest rate hikes by the U.S. Federal Reserve, while the Bank of Japan has maintained its negative interest rate policy. The excessive depreciation of the yen has led to a decrease in consumer purchasing power and a slowdown in corporate investment and production, contributing to Japan's stagflation situation.

Why this matters: The persistent economic contraction in Japan, despite the anticipated yen appreciation, highlights the challenges faced by the world's third-largest economy. The situation emphasizes the impact of global monetary policy divergence and the structural issues within the Japanese economy, which could have broader implications for international trade and investment flows.

Structural issues in the Japanese economy, such as heavy reliance on imported resources and sluggish domestic demand, have also contributed to the yen's depreciation. Inflation in Japan has not been accompanied by a surge in domestic demand, and real wage income has declined for 23 consecutive months.

Experts believe that the general trend of major central banks moving towards rate cuts and the Bank of Japan's slow rate increase will not change, leading to a scenario favorable for the yen to appreciate. However, they caution that it remains difficult for Japan to reverse its long-term economic downturn.

The Bank of Japan is expected to keep its policy rate unchanged at a two-day meeting starting Thursday, despite the persistently weak yen that has raised the prospect of higher inflation driven by import costs. Analysts are divided over when the next interest rate hike will come, as the central bank's dovish stance could further accelerate the yen's depreciation.

Japanese economist Hideo Kumano warned that the recent depreciation of the yen against the U.S. dollar will not benefit Japanese exporters or consumers. "Almost nobody believes that such a depreciation is beneficial to exporters," Kumano stated. The yen's weakness has led to rising import prices and increased costs for energy and food, which will further strain Japan's economy.

The Japanese government has hinted at potential currency market intervention to prevent further yen depreciation, but analysts say it is unlikely the Bank of Japan or the Ministry of Finance will take decisive action to stem the yen's fall right away. Authorities may opt for intervention through flexible bond purchase signals instead.

As Japan grapples with the economic challenges posed by the yen's depreciation and the persistent economic contraction, policymakers and market participants closely monitor the situation. The outcome of the Bank of Japan's upcoming policy meeting and the government's potential response will be crucial in determining the future trajectory of the Japanese economy and the yen's value.

Key Takeaways

  • Japan's economic contraction likely to continue despite yen appreciation
  • Yen depreciation due to US Fed rate hikes, BOJ's negative rate policy
  • Yen depreciation leads to decreased consumer power, corporate slowdown
  • Structural issues in Japan's economy contribute to yen's weakness
  • BOJ unlikely to intervene decisively to stem yen's fall, may use bond signals