Japanese Yen- Silent Killer Development in Global Economy

One of the most interesting development happening in currency market currently is Depreciation in Japanese Yen.

While the global media is focussed on probable economic impact of Russia-Ukraine war, effect of sanctions, supply chain shortage, energy crisis and many more such things The anticipated effect on Russian Rubel was very high but the same recovered sharply against dollar. However, the killer impact have been noticed in depreciation of Japanese Yen against global currencies. It depreciated from 114.83 on 1st March to 124.18 (till 28.03.2022). The global share of Yen in reserve currency is 5% (As per IMF data-Q3 2021-$697.35 Billion). Further, Japan is the largest foreign holders of US Treasury Securities globally holding $1303.10 Billion. 

Still the uncertainties continue, including the currently weak state of the Japanese economy, large interest rate differentials between Japan and other major markets and developments in related regional economies.

Brief overview of Japan

Before analysing the Japanese Yen depreciation against global currencies, let us talk about Real Effective Exchange rate (REER).

Brief Definition

The real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies. The weights are determined by comparing the relative trade balance of a country’s currency against that of each country in the index.

An increase in a nation’s REER is an indication that its exports are becoming more expensive and its imports are becoming cheaper. It is losing its trade competitiveness.

Some Important statistics of Japanese Real Effective Exchange rate

  1. Japan Real Effective Exchange Rate (REER: 2005=100: Month Avg: Japan) was 67.8 in Jan 2022, compared with the number of 68.5 in the previous month.
  2. Japan Real Effective Exchange Rate data is updated monthly and averaged 151.4 from Jan 1970 to Jan 2022.
  3. The data reached an all-time high of 151.4 in Apr 1995 and a record low of 57.2 in Aug 1970.

Charts will tell better picture of longer term:

With huge depreciation of Yen against global currencies REER is probably at all time low or near to 1970’s level.

Japan Exports

Note: South represents South Korea

Main imports were: mineral fuels (22 percent of total imports), with petroleum accounting for 10 percent and LNG for 6 percent; electrical machinery (15 percent) on the back of telephony, telegraphy and semiconductors; chemicals (10 percent) due to medical products and organic chemicals; machinery (10 percent) in particular computers and units; foodstuff (9 percent) such as fish and fish preparations and meat and meat preparations; manufactured goods (9 percent) on nonferrous metals; and raw materials (6 percent) mainly ore of nonferrous and iron ore and concentrates. Japan’s main import partners were China (23 percent), the EU (12 percent) in particular Germany (3 percent), the US (11 percent), Australia (6 percent), South Korea (4 percent), Saudi Arabia (4 percent), Taiwan (4 percent), the UAE (4 percent) and Thailand (4 percent).

Name of Item In Billion $
Machinery & Transport EquipmentJan-22        22.46
Mineral FuelsFeb-22        19.67
Petroleum & Petroleum ProductsFeb-22          9.24
ChemicalsFeb-22          9.14
Industrial ChemicalsJan-22          8.42
Miscellaneous Manufacturers ArticlesJan-22          8.08
PetroleumFeb-22          7.42
Liquefied Natural GasFeb-22          6.20
Gas,natural & ManufacturedJan-22          5.88
Crude Materials, Inedible, Except FuelsJan-22          5.51
FoodstuffFeb-22          5.50
Raw MaterialsFeb-22          5.36
Food & Live AnimalsJan-22          5.25
Medical & Pharmaceutical ProductFeb-22          4.67
Medical & Pharmaceutical ProductsFeb-22          4.67
Metalliferous Ores & Metal ScrapJan-22          3.96
Coal, Coke & BriquettesJan-22          3.71
CoalFeb-22          3.31
Office EquipmentJan-22          2.76

Japanese share in export market is Phenomenal. Inspite of the weak demography, the nation sustained its exports globally. But with the downfall in China which is the largest manufacturer, consumer (After US) and largest basket holder of global currencies have seen huge dent in its own economy. Japanese exports to China have also seen the same impact. Earlier Japan exports Goods worth 130 Billion dollar whose major potion was capital intensive goods along with Steel, Paints  and other construction material. Now the same has been substantially reduced. If Chinese real estate contribution is considered to be 30% to GDP directly then minimum 40 Billion Dollar worth of exports of China has already been impacted.

Conclusion

The impact on Japanese Yen is nothing but cumulative impact of Trade and Monetary policy errors of Central Banks in Japan. Unlimited QE, Yield curve control and holding each and every Assets with lots of Central Banks intervention since 3 decades has created vast amount of debt in the system. But now Japan has entered into Inflation phase where the negative Bond yields have now turned into positive Bond yields but yet the central banks are in no mood to shrink the balance sheet and still are living in the bazooka of providing unlimited liquidity and increasing those Debt to GDP level. While globally, central Banks are in the spree of increasing Interest rates like Bank of Canada or Bank of England or US Fed or Reserve Bank of Australia or Central Bank in New Zealand, Central Bank of Japan believes in Erdogan style of Policies in Turkey and refrained from increasing the Interest rates  yen sank and was followed by Chinese devaluation. Current conditions in China are so desperate that the idea of devaluation does not seem so far-fetched as the economy is affected with pandemic,fall in real estate sales and corporate debt troubles of real estate companies, lack of significant growth in consumption to wean off the dollar trade and impact of inflation on Chinese food supply. If a devaluation were to happen, it will significantly push many economies into trouble as the deflation in China will be pushed around the globe for all to suffer.

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