The Yen Weakens Despite the Bank of Japan Easing the Upper-bound of YCC


(Originally posted on October 31, 2023)


Initial foreign currency market reaction to the Bank of Japan’s (BoJ) announcement was tepid as the yen depreciated to over 150 per dollar after strengthening to 148.8 per dollar overnight. Short-term rates will stay low as the BoJ remains concerned about the fragility of Japan’s economic recovery.

A stronger yen will have positive implications for the Japanese economy. However, it appears that interest rates may need to go higher, but hopefully not much higher, to reverse the course of the yen depreciation:

  1. A stronger yen will reduce the cost of vital imported inputs such as energy, raw materials, and food and boost the gross margins of most domestically-oriented businesses.
  2. Businesses that have relied on payroll reduction to offset rising input costs can afford to raise wages as the gross margin widens.
  3. Export-oriented businesses are already benefiting from a large windfall of the weaker-than-expected yen.   
  4. Businesses will reduce unproductive investments as marginal funding costs rise, but interest rates are still low in real terms.
  5. Defined benefit pension liabilities decline as rates rise, boosting corporate profits.
  6. The government’s tax receipts will grow due to inflation and bracket creep that will offset the rising cost of debt servicing and help pay for rising social benefit expenses.

These factors can help shift Japan’s inflation to a wage-push type that benefits workers and creates a positive spiral for the Japanese economy from an imported cost-push type inflation that hurts most consumers.

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