📉 Yen Hits 20-Year Low!
Japan's economic problems are other worldly. Here's what's going on.
From war in Europe to Sri Lanka's crisis right at our shores, the global economy is in a mess.
And now even Japan's yen has declined to a 20-year low. Â
But why is this happening? And what does it mean for Japan?
ReadOn!
Japan's Economy 💴
While the whole world is considering raising interest rates, Japan is the odd one out.
Not only is it not raising interest rates, but it is also maintaining a negative interest rate (-0.1%).
Huh?
Yes, banks and other financial institutions actually have to pay the central bank interest to store money (beyond a certain amount).
But why?
Well, while the rest of the world battles inflation, Japan has been battling deflation.
Deflation is exactly what it sounds like. The opposite of inflation: a phenomenon where the prices of goods and services decrease instead of increasing.Â
This deflation began with the economic crisis of 1991 (when the real estate bubble burst in Japan).Â
Though deflation may sound good to you and I, it is not good for the economy as it stagnates growth. People often save their money and delay spending as it will be worth more in the future.Â
So, in 2016, it decided to adopt negative rates which would do away with this mindset. It would force banks and people to spend or invest their money back into the economy so it could grow.
But this has reduced the value of the Japanese yen as compared to the dollar.
You see, low real interest rates mean foreign investment in the country decreases (Japan's real interest rate: 1.07%; US' real interest rate: 2.3111%). After all, why would you invest in a country that is giving you low returns? So, less foreign currency is coming into the country. The low supply means the foreign currency is getting more expensive and this drives down the value of the yen.
But Japan didn't mind this. In fact, the low value of the yen has helped it.
Japan is the world's fourth-largest exporter all thanks to the declining value of the yen.
You see, because the dollar and other currencies have a much higher value than the yen, people in other countries can get more products from Japan at a low cost.
So, Japan rose as an exporter.
What Went Wrong? 🤨
If too much of a good thing is bad, too little of a good thing is worse.
These low interest rates were working fine for Japan till now.Â
But now as the US is raising interest rates along with several other countries, giving the investors better avenues to invest, the yen is falling to a critically low level.
But ReadOn, didn't you just say low yen prices were good?
Yes, to an extent low yen prices are good but at the current levels and at this moment in time, low prices are very problematic.
Global commodity prices are at an all-time high now thanks to the geopolitical tensions between Russia and Ukraine.
The critically low prices of the yen are making importing these products even more expensive.
This could be a huge problem for the people of Japan, which has a 15.7% poverty rate (India's poverty rate is 10.2%).Â
So, what can Japan do?
Solutions for Japan 💡
The number one solution for Japan is to increase interest rates. But Japan doesn't want to do this because this will limit the supply of money in the economy, further pushing the country into an economic crisis.
So, the only other solution left with it is selling dollars and buying yen.
How will this help?
The price of the currency depends on the supply and demand in the market.Â
If the supply of dollars is increased and the supply of yen is decreased then the price of the two currencies will balance each other out a little.
But this is only a temporary solution.
Japan does have the second-largest foreign reserves (money safely kept in its kitty and not in regular supply) but it cannot keep selling its reserves as a lack of foreign reserves could lead to an economic crisis which could leave the country incapable to import.
Whatever be the case, one thing that we can’t undermine is Japan's determination. It has built itself from unimaginable crises time and again. Why should this time be any different?Â
In a line: The yen has declined to a 20-year low because of Japan's unique monetary policy and the current world scenario.
Quick Question: Is raising interest rates the only way to boost a currency's value?
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