Because the government of Japan and the Bank of Japan (the country’s central bank) intervened in the currency market by buying yen and selling dollars, Japan’s currency defense has entered a new phase. However, Japan’s historically low interest rates have remained unchanged, and the movement of individual funds into assets located outside of Japan has not slowed. There is a deep-seated mistrust among those in Japan’s asset-forming class who are between the ages of 20 and 49 regarding the yen and the Japanese economy. The value of the yen may be able to be supported by temporary intervention. There is still a lack of confidence in the market.
On the afternoon of September 22, a man in his 30s who runs a restaurant in Tokyo was not the least bit surprised when he saw the news that the exchange rate of the Japanese yen against the US dollar had fallen into the range of 145 yen per US dollar. He had been expecting this to happen for some time. The yen is not a shocking development. If the value of the yen goes up, I’ll go out and buy some dollars.
In point of fact, the proprietor of the restaurant stated that during the month of August, when the value of the yen rose to approximately 130 yen per dollar, he “bought a fair amount of dollars.” The global epidemic caused by the coronavirus is the background for the current unease regarding the yen. He made the following statement: “Although I have maintained my business with financial subsidies, the repeated spending by the government has made people worry about whether or not (Japan’s) national finance and currency can bear it.”
Another male employee of the company who was in his forties and worked for the company invested one-third of his monthly salary in foreign equity investment trusts. “Roughly thirty percent of my assets are denominated in foreign currencies,” he stated. “I want to increase it some, so even if the government buys Japanese yen to intervene, I will continue to increase the amount of foreign currency holdings that I have,” he said.
The decline of the yen, along with the slowdown in the Japanese economy, has left me with a profound sense of dissatisfaction. Apple’s newest smartphone, the “iPhone 14 Pro,” can be purchased in Japan for a starting price of 149,800 yen (tax included, about 7,473.5 yuan). It has increased by more than 20,000 yen when compared to the release of the previous model, which was called the “iPhone13 Pro.” Fans expressed their disappointment that this was brought on by the weakening of the yen.
The “Big Mac index” accurately reflects the decline in the purchasing power of the Japanese currency. The most recent price in the United States was $5.15 (approximately 730 yen), while the price in Japan was only 390 yen, as reported by the British publication The Economist. In the United States, the cost of a burger is nearly twice as high as it is in other countries.
It has become more difficult to travel overseas from Japan as a result of the devaluation of the yen, rising prices in countries other than Japan, and actually rising air freight rates. According to Daisuke Tang Kamama, a representative from Mizuho Bank, “[Japanese] citizens are easily influenced by the common idea of ‘becoming poor because of the depreciation of the yen,’ which will have an impact on the formation of assets.”
Over the course of the past two decades, the average household in Japan has amassed more assets denominated in other currencies. When we compare the year 2002 to the end of June 2022, the amount of money invested in household assets by foreign portfolio investors increased from 9.4 trillion yen to 22.3 trillion yen, and the amount invested in foreign investment trusts increased from 5.7 trillion yen to 34.9 trillion yen. Based on the most recent available data from the Bank of Japan, Mizuho Bank has come up with these estimates (Central Bank).
At the end of June, the total value of yen cash deposits had nearly reached 1,100 trillion yen. This figure continues to represent more than half of the assets held by Japanese households. Only 10% of these foreign currency assets will generate more than 100 trillion yen in sales, so it’s important to keep that in mind. The size is roughly equivalent to the capital that is utilized for foreign exchange intervention, also known as Japan’s foreign exchange reserves.
There is a high probability that the yen will continue to weaken. Another male worker at the company stated that they “began buying foreign equity investment trusts this year, but without currency hedging.” The percentage of funds flowing into foreign equity investment trusts “without currency hedges” is reportedly very close to 100%, as stated by Mitsubishi Asset Brains.
There is a growing school of thought that the United States will have a difficult time avoiding an economic recession, and the depreciation of the yen may be about to usher in a situation that requires adjustment. But there will be fundamentally heavy selling pressure on the yen if individuals continue to turn to foreign currencies.
It is possible that this trend will continue unabated even if the government of Japan and the Bank of Japan engage in exchange rate intervention in the form of yen purchases or adjust their financial policy to become more accommodative. If it is limited to small-scale interventions and is unable to solve the fundamental problem of people’s worries about Japan’s future, then Japan may be troubled by the depreciation of the yen for a considerable amount of time.