Japan's Struggle: The Dual-Edged Sword of a Weaker Yen

Written by Simon White, a Bloomberg Markets Live reporter and strategist

Japan's Inflation Conundrum

A decline in the value of yen could potentially lead to an increase in inflation in Japan. However, this increase could potentially exceed desirable levels, particularly as there are increasing indications that price growth is becoming entrenched. Japan has been longing for a sustainable inflation rate of around 2% for many years. Now, with the pandemic, rising energy prices, and one of the most prolonged and expansive lax monetary policies in the history of global central banking, it seems that Japan may have finally achieved this goal.

The Challenge of Controlling Inflation

However, halting inflation at the appropriate level is akin to steering a large cargo ship - the decision to turn must be made well in advance. Although Japan's headline inflation is currently declining from recent peaks, thanks to lower oil prices, the so-called core-core CPI (excluding fresh food and energy) remains worryingly persistent, still fluctuating within approximately 0.5% points of its record highs. There are additional indications that inflation is becoming entrenched. The proportion of inputs to the CPI basket, which includes over 650 items, has risen to its highest level outside of a consumption tax increase and remains high.

The Role of Foreign Exchange in Inflation

Kazuo Ueda, the Governor of the Bank of Japan, has emphasized that foreign exchange is a crucial factor influencing inflation. His assertion is accurate. The recent depreciation of the yen will likely push the CPI to rise again soon. This comes at a time when long-term inflation expectations are increasing, as evidenced by the Tankan survey of businesses on output prices. Long-term household expectations of inflation also remain high and close to series peaks.

The Uncharted Territory of High Inflation Expectations

Japan has not had to contend with persistently high inflation expectations for many years. Ueda has also pointed out the adverse impacts on the economy of a sudden, one-sided depreciation of the yen. What could be even more harmful is the further stimulation of inflation, which already appears to be an overly generous gift to the Bank of Japan.

Article by Tyler Durden

Published on Wednesday, 08 May 2024, 17:55

Closing Thoughts

The situation in Japan represents a complex economic conundrum. A weaker yen may provide the inflation boost the country has long desired, but it also carries the risk of spiraling inflation and economic instability. What are your thoughts on this delicate balance? Do you think Japan can successfully navigate these economic waters? Share this article with your friends and start a discussion. To stay updated on this and other important economic news, sign up for the Daily Briefing, delivered every day at 6 pm.