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Yen Depreciation - Essay Macroeconomics - Group 4 - CTTT KTĐN K62
Yen Depreciation - Essay Macroeconomics - Group 4 - CTTT KTĐN K62
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Contents
Opening ..................................................................................................................................... 3
Content ...................................................................................................................................... 4
I. Theory .............................................................................................................................. 4
1. Concept of currency depreciation ........................................................................... 4
2. Overview of Bank of Japan ..................................................................................... 4
II. Japan's currency devaluation in 2023 .......................................................................... 4
1. State of the big currency flop in 2023 ...................................................................... 4
2. Causes behind big currency flop in 2023 ................................................................. 5
a) Bank of Japan's negative Interest rate policy………………………..…………….5
b) Japan’s carry trade unwinding………....…………………………………………7
3. Effects of Japan’s currency depreciation in 2023 ................................................... 8
a) Positive effects………………………………………..……………………………....8
b) Negative effects………………………………………………..………………….….9
4. Bank of Japan’s responses ...................................................................................... 10
a) Japan's policies……………………………………………………………………..10
b) Evaluation and forecast………………………………………………….……..….11
III. Recommendation ................................................................................................. 12
Conclusion ............................................................................................................................... 15
References……………………………………………………………………………………16
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Opening
1. Reason to choose this topic:
- Timely and Relevant: The Yen's depreciation in 2023 was an economic crisis with
ongoing effects. Studying this helps us understand recent economic events and their
impacts.
- Policy Debate: The Bank of Japan's response to the depreciation has been a subject of
debate. Researching their actions and the arguments for and against them helps us
understand the complexities of central bank policy.
- Wider Economic Impact: A weak Yen affects the economy, consumers, and inflation.
By exploring these effects, this research can provide better insights into business
interactions.
- Potential for Future Developments: The Yen's depreciation and the Bank of Japan's
response have long-term consequences. This research can analyze potential future
scenarios and their economic implications.
This research aims to analyze the complex interplay between the significant
depreciation of the Japanese Yen in 2023 and the Bank of Japan's (BoJ) policy
responses. The objective of this research is to analyze the causes and consequences of
the Yen's depreciation in 2023, along with the effectiveness of the Bank of Japan's (BOJ)
responses to the situation. This analysis will be achieved by discussing some of the
economical concepts, exploring the Bank of Japan and the overview of currency
depreciation and researching the cause and effect of the currency depreciation along
with how Bank of Japan respond to the situation.
2. Research scope:
We focus on the significant depreciation of the Japanese Yen in 2023 and the Bank of
Japan's policy responses. It will aim to comprehensively analyze the causes,
consequences, and effectiveness of the BOJ's actions. To explore the causes of Yen
Depreciation, we focus on Bank of Japan’s negative interest rate and investors’ lack of
confidence in the Yen. The effects of big currency depreciation in Japan 2023 will be
discussed based on the positive effects on export-oriented and tourism industry and the
negative effect on import-oriented industry. About Bank of Japan’s responses, we will
talk about its existing policy (ultra-loose monetary policy with price stability of 2%,
negative interest rate of -0.1% and Quantitative and Qualitative Monetary Easing (QQE)
with Yield Curve Control along with the policy framework changes (raise interest rate
to around 0% to 0.1% and abandon yield curve control)
3. Research method:
We focus mainly on online sources and do our research through reputable financial news
websites, governmental websites, and research papers. We also use some reliable
artificial intelligence sites for extra help.
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Content
I. Theory
1. Concept of currency depreciation
A depreciation is a fall in the external value of one currency against another. Depreciation
happens naturally due to market forces.
For example: the Australian dollar might depreciate against the US dollar so that one Australian
dollar buys less of the US currency.
A currency depreciation could be caused by some reasons. Firstly, a fall in the world price of a
country’s major export. This leads to a decline in export revenues and a fall in overseas demand
for the exporting nation’s currency. Secondly, a surge in the value of imports causes a deficit
on the current account of the balance of payments which leads to a net outflow of currency,
causing exchange rate weakness. Another reason is a country’s central bank reduces interest
rates, leading to a net outflow of hot money - this is a short-term financial capital that searches
for the best risk - adjusted rate of return. The last one is depreciation might be caused by
intervention from the Central Bank e.g., it goes into the market to sell their own currency and
buy gold and foreign currencies.
Currency depreciation can have both positive and negative consequences. On one hand, it can
make a country's exports cheaper and more competitive in the global market. On the other hand,
it can make imports more expensive, leading to inflation. It can also reduce the purchasing
power of people within the country.
Regarding the Bank of Japan, it was established in 1885 with almost every above-mentioned
function to control the economic performance. Due to Japan's prolonged deflation, starting
around the mid-1990s, the BOJ is famous for its continued ultra-loose monetary policy. To
exercise this act, the BOJ has kept the interest rate nearly 0 percent to encourage borrowing and
investment. Moreover, it also purchased many government bonds to inject money to the
economy. These actions are operationalized to deal with recession, particularly the issue of
deflation in Japan.
Japan's exchange rate environment underwent a significant shift in 2022, marked by a sharp
depreciation of the Yen. In response to this rapid depreciation, the Ministry of Finance
conducted two rounds of foreign exchange interventions3. However, the Yen's depreciation
resumed dramatically in May 2023.
The future direction of the Yen is complicated and will depend on several factors, including the
global economic outlook and the actions of major central banks.
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When Japanese people took their money out so suddenly, the money supply in an economy
grew at a faster rate than the economy's ability to produce goods and services, which led to a
higher inflation rate. The inflation rate in Japan 2023 exceeded the Bank of Japan's 2% target
and reached 3.2% in May. A rise in inflation erodes the purchasing power of the Yen. This
meant that a larger number of Yen was required to purchase the same amount of goods and
services domestically. The value of the Yen depreciated accordingly.
5 Bank of Japan
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In the situation where the Yen gradually lost its value, the Bank of Japan unexpectedly imposed
a policy that weakened the Yen even more. This left us a big question about the ulterior motives
behind their practice. Dig a little deeper into the economic struggles of Japan, the country
experienced three "Lost Decades6" – trying to escape deflation7. A key consequence of deflation
in Japan is the decline in aggregate demand, the total amount of goods and services demanded
in an economy. As prices fell, Japanese consumers tended to postpone purchases in anticipation
of further price reductions. This wait-and-see approach leads to a decrease in people's
consumption. Businesses could not profitably produce products that were not consumed. In
other words, they faced pressure to reduce costs to maintain profitability in the face of falling
prices. This translated to downward wage pressures for workers. Lower wages then reduced
disposable income, further dampening aggregate demand, and perpetuating the deflationary
spiral.
Deflation is more dangerous than inflation because it drags the economy deeper into recession8.
As a matter of fact, Japan might have decided to make a trade-off. They lowered the interest
rate to below 0% to create inflation, which is opposite to deflation. However, the inflation rate
in Japan is 3.2% in 2023 (below 6,5%), which is controllable.9
The implementation of a negative interest rate policy in Japan, initiated in 2016, did not
immediately translate to a depreciation of the Yen. This suggests that other factors were at play
in the currency's decline, observed in 2022. The emergence of the COVID-19 pandemic in late
2019 likely served as a significant catalyst. As evidenced by the aforementioned graph, a period
of pandemic-induced quarantine led to a noticeable decrease in consumer spending within
Japan. However, by 2021, with a marked decline in COVID-19 cases and the subsequent lifting
of emergency measures by the Japanese government, a surge in demand for goods materialized.
Unfortunately, the domestic economy had not fully recovered from the pandemic's disruptions,
resulting in a supply-side lag10. This inability to meet the renewed demand with a commensurate
increase in production triggered inflation in Japan. The confluence of these events, coupled
with the Bank of Japan's negative interest rate policy, positioned Japan on a gradual path away
from deflation.
More on Japan; according to data from the Bank of Japan (BOJ), the Yen carry trade has led to
net investment outflows for more than a decade. This means that more money has been leaving
Japan for investments in other countries than has been coming in from abroad. However, in late
2022, due to BOJ’s ultra-low monetary policy that affect interest rates and currency values, the
While unwinding a carry trade typically leads to Yen appreciation, a large-scale exodus can
trigger a surprising depreciation. According to the International Monetary Fund (IMF)
research on "Anatomy of Sudden Yen Appreciations”, this triggered a massive unwinding of
carry trades. Investors dumped their high-yielding currencies (like the US dollar) and rushed to
repay Yen loans. This sudden surge in Yen supply, estimated in the billions by market analysts,
overwhelmed the typical appreciation effect. The key is, unlike the US Federal Reserve, the
Bank of Japan was stuck at a zero lower bound for interest rates. This meant they couldn't raise
rates to make the Yen more attractive. The Yen, instead of appreciating as expected, started
weakening against the dollar. This depreciation became self-fulfilling, as the initial drop fueled
further unwinding. Investors, fearing even greater losses, rushed to exit carry trades, further
weakening the Yen. This rapid unwinding cycle demonstrates how, in extreme circumstances,
the Yen's traditional behavior in carry trades can be flipped completely.
The depreciation of Yen makes Japanese assets relatively cheaper for foreign investors when
measured in their home currencies. This makes Japan an attractive destination for foreign direct
investment (FDI) and portfolio investment (FPI), as investors seek opportunities to capitalize
on potentially undervalued assets.
Many Japanese companies have overseas subsidiaries. With a weaker Yen, the profits earned
in foreign currencies become more valuable when converted back to Yen. This can encourage
companies to repatriate more profits, increasing the overall flow of money back into Japan.
b. Negative impacts:
Given the widening interest rate gap between Japan and the rest of the world, it is natural for
the Yen to drop. Though welcomed for making exports more competitive, the depreciation is
raising the import prices, notably for key energy items such as oil, which can trigger inflation.
As Japan relies on imports for much of its fuel and food, a weaker Yen has put strain on import-
dependent industries and households.
Japan’s import
Gasoline prices have been subsidized by the government but temporarily hit an all-time high in
September 2023. Prices of imports ranging from luxury cars to expensive watches to
smartphones also hiked considering Yen weakness. For example, the price of a new-model
iPhone has tripled to 190,000 Yen over the past decade, equivalent to 60% of the average
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monthly salary in Japan while salaries have remained broadly unchanged over that period. Food
prices are also rising sharply due to higher distribution costs and increased prices of packaging
materials.
Higher import costs have dealt a direct blow to firms. According to Tokyo Shoko Research, 38
firms have already filed for bankruptcy due to the weak Yen through September 2023. Inflating
costs of raw material imports brought on by weak Yen continue to squeeze the profit margins
of firms in import-dependent industries. Dairy and other companies are also hit by the soaring
cost of imported feed and other raw materials.
According to the Bank of Japan, imported goods now account for 34% of durable consumer
goods, such as home appliances and furniture, up 1.7 times from a decade earlier. As Japanese
consumers are buying more imported products, they are more sensitive to the higher prices
spurred by the Yen's weakness. The rise in Japan's consumer price index for August 2023,
excluding perishables, was 3.1% above the figure recorded the same month last year. Narrowed
down to foodstuffs, the increase reached 9.2%. The Yen’s weakness now become a pain point
as soaring prices have strained household budgets, thereby reducing Japanese purchasing
power.
With the plunging yen, a growing number of young Japanese are applying for “working
holiday” visa programs, which allow them to engage in employment while spending holidays
in some countries such as Australia and Canada. They are taking advantage of this program to
escape low wages in Japan and earn higher wages in Yen amid its weakness against major
currencies. In addition, many sectors in Japan, including tourism and construction, are grappling
with labor shortages. Many industries rely on foreign workers, but the weak Yen reduces the
number of wages after conversion into the home countries’ currency. Some say the appeal of
working in Japan has diminished, making it more difficult to lure foreign workers to Japan.
In order to overcome deflation as early as possible and achieve sustainable economic growth
with price stability, The Bank of Japan conducts monetary policy based on that principle. In
January 2013, The BOJ set the price stability target at 2 percent in terms of the year-on-year
rate of change in the consumer price index (CPI). The Bank recognizes that the inflation rate
consistent with price stability on a sustainable basis will rise as efforts by a wide range of
entities toward strengthening competitiveness and growth potential of Japan's economy make
progress. And until now, the BOJ keeps this target.
The BOJ’s existing policy is ultra-loose monetary policy and despite Yen depreciation in 2023,
their monetary policy remained unchanged throughout the year. After facing a prolonged period
of deflation during the 1990s and early 2000s and global financial crisis in 2008, the BOJ
decided to implement “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve
Control (YCC) in 2016 to stimulate economic growth. QQE is a form of monetary policy in
which a central bank purchases securities from the open market to reduce interest rates and
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increase the money supply. In January 2016, The BOJ introduced a negative interest rate policy
as part of its QQE program. Under this policy, the BOJ charges a negative interest rate of -0.1%
on excess reserves held by commercial banks at the central bank, which means that borrowers
are essentially paid to borrow money while savers are charged a fee to store their money. The
policy had some immediate effects on the Japanese economy but also posed several challenges.
So in the same year in September 2016, the BOJ introduced the Yield Curve Control. Yield
curve control (YCC) involves targeting a longer-term interest rate by a central bank, then
buying or selling as many bonds as necessary to hit that rate target. Under this policy, the BOJ
targets a 10-year government bond yield of around 0%.
Concerning the monetary policy statement made on December 19, 2023, the BOJ decided to
continue with monetary easing regardless of Yen flop as they considered this movement as part
of interest rate differential. Japan’s negative interest rates and rising inflation in the US and
other countries make the Yen less attractive to investors compared to the dollar, or euro. This
leads to selling pressure on the Yen as investors sell Yen to invest in currencies with higher
returns. Moreover, they regarded there were extremely high uncertainties surrounding
economies and financial markets at home and abroad and the ultra-loose monetary policy was
consistent with their long-term objective of achieving the price stability target of 2 percent,
accompanied by wage increases. Japan’s central bank has been cautious in unwinding its long-
held ultra-loose monetary policy, wary that any premature move could jeopardize recent
nascent improvements. "We have yet to foresee inflation stably and sustainably achieve our
price target. That's why we must patiently maintain ultra-loose monetary policy," Ueda told a
press briefing after the policy decision. However, there were strong indications that the BOJ
was moving towards policy changes to address the weak Yen. “When we can foresee inflation
steadily and sustainably hitting 2%, we will consider ending YCC or revising negative interest
rates”_Kazuo Ueda - the Governor.
On March 19, 2024, The Bank considered that the policy framework of Quantitative and
Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate
policy to date have fulfilled their roles. The BOJ decided to raise its short-term interest rates to
around 0% to 0.1% from -0.1% at the end of its two-day March policy meeting. They also
abolished their radical yield curve control policy for Japanese sovereign bonds, which the
central bank has employed to target longer-term interest rates by buying and selling bonds as
necessary. “The likelihood of inflation stably achieving our target has been heightening... the
likelihood reached a certain threshold that resulted in today’s decision,” BOJ Governor Kazuo
Ueda said at a press conference after the central bank’s decision.
After the decisions of the BOJ, Yen weakens. The Yen weakened sharply to beyond 150 to the
dollar — a level that previously prompted intervention from Japanese authorities. “As always,
I won’t comment on short-term currency moves,” Ueda said at the press conference. “But if
currency moves have a big impact on our economic and price forecasts, we will stand ready to
take an appropriate monetary policy response.”
In summary, throughout the year 2023 of Yen depreciation, the Bank of Japan did not change
their policy but stuck to the ultra-loose monetary policy. They considered the Yen flop as part
of interest rate differential and the ultra-loose monetary policy was consistent with their long-
term objective, so they needed more time to exit from this policy. On March 19, 2024, the BOJ
made changes to their monetary policy framework. However, after this pronouncement, Yen
slides. The BOJ is ready to act if currency moves have a big impact on their economic and price
forecasts.
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b. Evaluation and forecast
b.1. Evaluation
The BOJ's commitment to low-interest rates and quantitative easing aimed to stimulate
economic growth and prevent deflation. This could be seen as positive for long-term economic
health since higher interest rates can reduce borrowing, increase saving and decrease buying,
make steak and bonds less attractive…
A weaker Yen can make Japanese exports more competitive in the global market. When the
Yen weakens, it becomes cheaper for foreign buyers to purchase Japanese goods. Imagine a car
priced at 100,000 Yen. With a strong Yen, this might translate to $1,000 USD. But with a
weaker Yen, it could translate to only $800 USD. This lower price tag makes Japanese products
more attractive to foreign buyers.
For Japanese manufacturers, even if they sell their products at the same price in foreign
currency, the weaker Yen translates to more Yen earned per unit sold. This translates to higher
profit margins for export-oriented companies.
b.3. Forecast
The BOJ's response prioritized maintaining low interest rates to support the domestic economy,
but the effectiveness of YCC in reducing the Yen's low level is still an issue. The new
management of the Bank of Japan may decide to switch to traditional management. However,
when approaching this change, it is necessary to be careful not to affect the recovery.
The most sustainable solution likely lies in a different but slightly similar approach. Combining
controlled monetary policy adjustments with structural reforms aimed at boosting domestic
growth and resilience offers the best chance for long-term stability and a stronger Yen. This
could involve:
• Phased Rate Increases: In March 2024, Japan raised the interest rate and the Yen
once again got deeply depreciated. However, in order to address inflation,
stabilize the Yen without derailing growth, we guess that the BOJ will continue
to gradually increase the interest rate.
• Maintaining YCC: The BOJ might stick with YCC but with some adjustments,
like allowing for more flexibility in the target yield range.
Adjusting policies to maintain stable domestic consumption is crucial for Japan to balance its
goals of fostering economic growth while keeping inflation in check. By carefully managing
policies related to taxation, government spending, and monetary measures, Japan can encourage
consumer confidence and spending without risking runaway inflation. This involves
implementing measures that support household income, such as targeted tax cuts or subsidies,
while also ensuring that inflationary pressures are kept in check through prudent monetary
policy. Striking this balance is essential for sustaining economic expansion while safeguarding
the purchasing power of consumers, ultimately contributing to long-term stability and
prosperity in Japan's economy.
4. Speculation:
Reviewing and potentially adjusting the Bank of Japan's (BOJ) negative interest rate policy is
crucial in the context of maintaining ultra-loose monetary policy to stimulate growth. One
approach the BOJ could explore involves targeting a yield curve control. Rather than
persistently keeping short-term interest rates negative, the BOJ could set specific yield targets
for longer-term government bonds. This would allow for some upward movement in short-term
rates while still providing overall stimulus to the economy. Additionally, introducing tiered
deposit rates could be beneficial. By offering different interest rates for banks based on the
amount of reserves they hold, the BOJ could incentivize banks to lend more to businesses and
individuals, thereby boosting economic activity. These adjustments could help mitigate the
negative effects of the current policy on the Yen while continuing to support economic growth.
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Though this is our suggestion for Japan in 2023, there were significant changes in Japan policies
in 2024. After 8 years of implementation with many controversies, the Bank of Japan (BOJ)
had a historic turning point when it stopped its negative interest rate policy. BOJ on March 19
announced to raise short-term interest rates to 0-0.1%, instead of -0.1% as before.
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Conclusion
In conclusion, the depreciation of the Japanese Yen throughout 2023, followed by the Bank of
Japan's policy responses, presents a nuanced case study in contemporary economic policy and
its ramifications within Japan. This situation highlights the challenges central banks face in
navigating currency depreciation amidst varied national economic dynamics. The Yen's
significant depreciation brought about a complex interplay of domestic economic pressures and
market forces, prompting varied responses from the Bank of Japan. These responses, including
maintaining ultra-loose monetary policy and later adjusting interest rates and abandoning yield
curve control, underscore the delicate balance central banks must strike between stimulating
economic growth and maintaining currency stability within the national context.
Moreover, the Bank of Japan's strategies reveal the inherent trade-offs and potential
consequences of prolonged ultra-loose monetary policies, particularly within a complex
domestic economic landscape. While these policies aimed to combat deflation and spur
economic activity, they also contributed to the Yen's depreciation, impacting the domestic
economy and its broader economic dynamics. The eventual policy shift in 2024 indicates a
recognition of these challenges and a nuanced approach towards fostering economic stability
and growth while attempting to mitigate adverse effects on the currency.
This analysis underscores the importance of adaptive policy frameworks that can respond to
evolving economic conditions while considering both short-term impacts and long-term
objectives. It also highlights the role of structural reforms in enhancing economic resilience and
stability within Japan. As Japan continues to navigate its economic trajectory, the experiences
of Japan and the Bank of Japan provide valuable insights into the complexities of monetary
policy, currency management, and their broader economic implications.
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