Why is the Japanese yen currency collapsing?

Data current as of 5/6/2024

Key points

• Japanese interest rates remain near 0%: (0:42)
• The BoJ also faces a bloated balance sheet to normalize: (2:54)
• Japan has been hurt by relative economic weakness: (4:04)
• Continued US growth has spurred USD outperformance: (5:49)
• How much further can JPY depreciate?: (9:04)

Japanese interest rates remain near 0%

The Bank of Japan (BoJ) has maintained interest rates at near-zero levels, a stance that's been consistent for several years with rates in negative territory until this January. Currently, there appears to be no inclination from the BoJ to increase rates further. This policy is designed to stimulate economic activity by making borrowing cheaper, yet it poses challenges for investors looking for yield on Japanese yen.

The BoJ also faces a bloated balance sheet to normalize

In addition to its low interest rate policy, the BoJ is confronted with the task of normalizing its expanded balance sheet. Governor Ueda has acknowledged the necessity of this process but has indicated that formulating and implementing a stable plan could span years. The balance sheet’s size, bloated by years of asset purchases aimed at stimulating the economy, represents a significant unwinding challenge with a fragile path forward to avoid further destabilization.

Japan has been hurt by relative economic weakness

Even with the BoJ’s ultra-loose monetary policy, Japan's economy has not realized growth comparable to that of the US. This relative economic weakness stymies investment and consumption, contributing to Japan's longstanding struggle with deflationary pressures. Despite efforts to kickstart growth in the employment sector in particular, the economy remains in a precarious balance.

Continued US growth has spurred USD outperformance

The US economy has exhibited robust growth post-pandemic, showcasing substantial GDP increase even against the backdrop of 5%+ interest rates. This sustained growth has empowered the US dollar, enabling it to outperform a basket of global currencies, including the Japanese yen. The strong USD reflects the underlying strength and resilience of the US economy in 2024.

How much further can JPY depreciate?

The yen hit all-time lows against the USD, taking USD/JPY above 160.00 intraday last week before suspected intervention from the BoJ taking the pair down a few hundred pips. Even though there is no historical precedent for further decline against the dollar, prices against the British pound (GBP/JPY) in 2008 above the current level suggest there could room for further depreciation in the yen. As traders gauge these dynamics, understanding the pivotal role of economic policies and performance becomes essential in forecasting currency movements.

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