Yen Hits Lowest Level Since 2015, and Japan, U.S. Are OK With That

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Strong dollar helps lower prices for American consumers hit by inflation, so Washington isnt pushing for Tokyo intervention

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The strong dollar means Americans and others whose currencies are linked to the dollar get more bang for their buck when they buy goods made in Japan, a potential boon with US inflation running at nearly 8%.

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It also means Japanese manufacturers have lower costs in dollar terms and gain an edge over US competitors. That is driving Japanese policy makers to say that, on the whole, they are fine with the currency moves.

“There is no change in the basic structure that a weaker yen has positive effects on the Japanese economy by pushing up the overall economy and prices,” Bank of Japan Gov. Haruhiko Kuroda said at a parliamentary session on Friday.

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The central bank estimated in a January report that a depreciation in the yen by 10% would push up Japan’s gross domestic product by about 1%.

On Monday, the chief government office, Hirokazu Matsuno, said Japan was watching the market closely and “any rapid movements are not desirable.”

The yen’s fall stems largely from the widening interest-rate differential between Japan and the US. The US 10-year Treasury now yields nearly 2.5%, after the Federal Reserve raised rates and penciled in six more increases this year. That is 10 times the 0.25% yield on the equivalent Japanese government bond—at the top of the Bank of Japan’s targeted range. Meanwhile, the two-year Treasury yield is 2.3%, while the Japanese equivalent yield is just under zero.

On Monday, the Bank of Japan stepped into the market to defend its policy, offering twice to buy an unlimited quantity of 10-year government bonds at a price that would prevent the yield from rising further. It said it would conduct similar operations Tuesday through Thursday. Though low, the Japanese yield is still higher than at any time since January 2016.

Other things being equal, the US-Japan interest-rate gap makes it better to hold dollars than yen, because the returns are higher. In particular, analysts say the yield gap is reviving the “carry trade,” in which investors borrow yen at low rates and convert the money into dollars earning more interest.

Mr. Kuroda at the central bank is under little pressure to raise rates to match the US trend, because inflation remains relatively quiet in Japan.

In the past, a sharp fall in the yen would likely have drawn outrage from US politicians and companies. When he was in office, President Donald Trump frequently expressed dissatisfaction with other countries’ weak currencies.

“They play the valuation market, and we sit there like a bunch of dummies,” Mr. Trump said shortly after taking office, singling out Japan, China and Germany.

But now, a strong dollar pushes down the cost of imported goods and tamps down inflation, a top concern for the Biden administration heading into fall midterm elections.

The Treasury Department’s most recent foreign-exchange reportreleased in December at a time when the yen was already weakening, expressed no concern about the moves.

While many Japanese companies have shifted production overseas, limiting the benefits of a weak yen, enough manufacturing in Japan that the benefits can be sufficient.

Daiwa Institute of Research estimates that a 10-yen depreciation against the dollar—for example, if the dollar buys 125 yen instead of 115 yen—would raise one measure of Japanese companies’ collective operating profit by nearly 1.5 trillion, equivalent to about $12 billion. Auto makers in particular still export many made-in-Japan vehicles to the US, and the dollars they earn from American car buyers are now worth more in yen terms.

Takahiro Sekido, a strategist at MUFG Bank, said it would be difficult for the US to push down the dollar even if it wanted to, because the world is turning to the US to substitute for Russian energy. To buy American oil and gas, countries need dollars.

“The US has no choice but to accept a strong dollar, at least in the short term,” Mr. Sekido said.

The weak yen isn’t entirely good for Japan because it adds to the burden of oil and gas imports, which Japan needs dollars to buy. Higher oil prices and unfavorable currency rates eventually get passed to consumers who pay more for gasoline and electricity.

The Japanese government is addressing the energy issue not by trying to change currency rates but by giving subsidies to oil distributors and preparing other support to ease the sting.

“We must respond flexibly to soaring prices of oil and other products,” Prime Minister Fumio Kishida said Monday.

Write to Megumi Fujikawa at [email protected]


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