The value of Japan’s currency has tumbled so much, that its value is back to where it was in 1990, shortly after Japan’s famous “bubble economy” burst. For a moment on Monday it was trading at 160 yen to US$1. A few years ago, it was closer to 100 yen to US$1.
The yen’s accelerating slide could ultimately be bad news for people in Japan. A weaker yen squeezes households by increasing import costs. Japan is heavily reliant on imports for both energy supplies and food, meaning inflation could rise.
A weaker yen is however a boon for Japanese exporters’ profits – and for tourists visiting Japan who find their currencies going further.
Why has the yen fallen so far?
The yen has been steadily sliding for more than three years, losing more than a third of its value since the start of 2021.
One factor behind its fall is momentum: the yen falls because investors are selling it – and investors continue to sell it because it is falling. In such instances, the market enters a self-fulfilling loop.
As a result of the falling currency, exporters are discouraged from converting foreign proceeds into yen, further decreasing demand.
However there are also major policy reasons for the currency’s sharp decline.
For years, the Bank of Japan (BOJ) has kept interest rates extraordinarily low to encourage more inflation in its economy, as well as to boost bank lending and spur demand.
In February, in the face of widespread labour shortages and a weakening yen, Japan was overtaken by Germany as the world’s third-biggest economy and slipped into recession.
With low interest rates seen as a key factor in the rapid decline of the yen, last month the BOJ ended its policy of keeping its benchmark interest rate below zero, lifting its short-term policy rate from -0.1% to between zero and 0.1%.
After that decision, markets were then focused on the pace of further rate rises. On Friday, the BOJ announced it would hold interest rates steady, signalling that further increases weren’t imminent. This precipitated another round of selloffs in the yen, putting more pressure on the currency.
It was this wave of selloffs that drove the currency down to 160 yen to the dollar for the first time since 1990.
What effect is it having?
The decades-low value of the yen means tourist dollars are going further than they have for generations, leading to a boom in the industry. As well as the US dollar, the yen has also hit multi-year lows against the euro, the Australian dollar and the Chinese yuan – all strong tourism markets for Japan.
In February, Japan recorded 2.79 million visitors – a record for the month.
Domestic consumption, however, remains a major weak spot. Households tend to be net importers and are facing higher prices due to the weak yen.
The weakening yen is also a factor in the decision by big Japanese investors’ to keep their cash abroad, where it can earn better returns. This trend is exacerbated by an unusually strong US dollar which has meant that American investments and assets offer far better returns for major financial institutions.
Japan intervened in the currency market three times in 2022, selling US dollars it holds in reserve in order to buy yen. Tokyo is estimated to have spent around $60bn defending the currency at that time.
On Monday, after briefly hitting its multi-decade low, the yen rose sharply, leading traders to suspect that after weeks of threatening to intervene, Japan had stepped in to support its currency.
Japan’s top currency diplomat, Masato Kanda, declined to comment when asked if authorities in Tokyo had intervened.
“Today’s move, if it represents intervention by the authorities, is unlikely to be a one-and-done move,” said Nicholas Chia, Asia macro strategist at Standard Chartered Bank in Singapore.
“We can likely expect more follow through from [Japan’s Ministry of Finance] if the dollar/yen pair travels to 160 again. In a sense, the 160-level represents the pain threshold, or new line in the sand for the authorities.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
