Recent remarks from Japanese policymakers show that they are clearly concerned about the low value of the currency.18 The BOJ could raise rates further to support the yen. After all, a weaker currency raises the cost of imports, which can exacerbate inflation. However, raising rates further also risks suppressing inflation too much and putting Japan back on a deflationary path.
BOJ Governor Kazuo Ueda has so far insisted that monetary policy will be calibrated for inflation and not the yen. And, in his remarks to the Japanese parliament, he noted that currency market intervention was up to the Ministry of Finance,19 which has historically been the case. In October 2022, the Ministry of Finance intervened after the yen had lost about 30% of its value compared to 2021. Notably, the value of the yen in the week following the March BOJ meeting was slightly weaker than it had been in October 2022, on average,20 suggesting another intervention may be on the horizon.
The silver lining of a weak yen is the strength it provides to Japan’s international trade position. In January, Japan’s goods balance returned to a surplus for the first time since 2021, though it has since moved back to a deficit in February.21 Goods exports were up 7.8% in February 2024 on a year-over-year basis.22 Export strength comes despite relatively tepid global economic growth. Exports to the European Union, where several countries were in a technical recession last year, were up 14.6% from a year earlier in February.23 Exports to China, which struggled with domestic demand, were up 13.8% in the year to date, relative to a year ago.24 Although export growth has occurred across several goods categories, transportation equipment has been the largest source of strength. Transportation equipment exports were up 20.1% from a year ago in February.25 Services exports have also been very strong. The number of foreign visitors to Japan in February was the highest since July 2019.26 Travel-related exports spiked at the end of 2023 and were 29.1% higher in January than they were four years earlier.27
Although the BOJ has tightened its monetary policy, which would ordinarily restrain economic growth, Japan’s economy is likely to strengthen, particularly in the second half of this year. Monetary policy will remain relatively loose even if the central bank raises rates further—after all, the rate remains very close to 0%. More importantly, wages are poised to grow faster than inflation, which should reverse the decline in real consumer spending. The yen will likely strengthen later this year if the US central bank fully adopts a dovish approach as expected, but it is unlikely to snap back to its pre-pandemic value any time soon. This should prevent international trade from turning into much of a headwind this year.
