The rapidly depreciating yen is starting to hurt the Japanese economy, but the BoJ’s policy options are limited


(Originally published on April 24, 2024)

The yen depreciated by about 7% against the US dollar since the beginning of 2024 and by about 40% in the past three years, making vital imports such as energy, raw materials, and food more expensive and hurting the profit margins of businesses that are not able to pass on the rising cost. Furthermore, the recent surge in global commodity prices will make it even more expensive in the coming months. The BoJ wants to raise rates to slow the yen’s slide but is afraid to do so.

– Business leaders are starting to express concerns about the negative economic implications of the rapidly depreciating yen.

– The Bank of Japan Governor Kazuo Ueda shifted his position to suggest that a change in monetary policy may be required if the rising import prices caused by the weak yen push up inflation.

– However, raising interest rates may choke the wage rise momentum, which is crucial for sustaining Japan’s fragile economic recovery.

Rising import prices pushed the Corporate Goods Price Index (CGPI) to 120 in 1Q2024 (2020=100), and it is likely to increase further in April 2024, as commodity prices indicated by the Bloomberg Commodity Index increased by 4.2% in month-to-date April 2024 compared to 1Q2024.

Exhibit 1: Rising import prices pushing up corporate goods prices

Sources: Bank of Japan, Ministry of Internal Affairs and Communications
* Month-to-date April 2024, Import Price Indexes and CGPI are the author’s estimates

Business leaders, including Chairman Takeshi Niinami of the Japan Association of Corporate Executives, Chairman Ken Kobayashi of the Japan Chamber of Commerce and Industry, and Chairman Masakazu Tokura of the Japan Business Federation on separate occasions, expressed concerns about the negative economic impact of the rapidly depreciating currency over the past week.

The core consumer price index (CPI), which stood at 106 in 1Q2024, has risen much slower than CGPI, reflecting consumers’ resistance to higher prices (Exhibit 2). Real wages that declined for 23 consecutive months as of February 2024 may finally show some growth starting this month when the announced wage increases begin to take effect.

Exhibit 2: Profit margins are tighter because consumer prices are rising slower than CGPI

Source: Ministry of Internal Affairs and Communications
* Month-to-date April 2024 CGPI and Core CPI are the author’s estimates

However, if interest rates are raised to support the yen, the BoJ risks choking the wage rise momentum, which is crucial for sustaining Japan’s fragile economic recovery. Moreover, due to the fragile state of the Japanese economy, the BoJ may not be able to raise rates sufficiently to reverse the yen’s slide, given that US interest rates are likely to remain elevated.

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