Yen’s Real Effective Exchange Rate Falls to Record Low

The value of the yen has slumped to the lowest on record, as measured against a broad basket of its peers and adjusted for inflation, according to data from the Bank for International Settlements.

(Bloomberg) — The value of the yen has slumped to the lowest on record, as measured against a broad basket of its peers and adjusted for inflation, according to data from the Bank for International Settlements.

The data — which stretch back to 1970 — underscore the pressure on the Bank of Japan to normalize its ultra-easy monetary regime, which continues to weigh down the nation’s interest rates and weaken the currency. The drop in the so-called real effective exchange rate means Japanese have to pay more for imported goods and services at a time when wage growth is failing to compensate for inflation.

The BOJ, which will announce its latest policy decision Friday, took the yen into account when it tweaked its yield-curve control settings in late July. It is expected to stand pat at this meeting. 

The BIS data show the yen depreciated by 1.5% in August.

While the yen’s drop is fueling inflation — which is a goal of the BOJ — it’s not the kind of price growth driven by domestic demand that the central bank seeks. Meanwhile, the benefits of a lower yen for export competitiveness are waning amid a long-term shift overseas of many Japanese factories. 

The yen’s value against the dollar in the spot market has dropped about 12% this year, making it the worst performer among its Group-of-10 peers. 

The yen is “still way too cheap,“ said Michael Metcalfe, head of macro strategy at State Street Global Markets. “A weak yen has become more of a hindrance than a help and the rationale to at least stop further yen weakness is growing once again.”

The slide is also alarming the government. Japan’s top currency official, Masato Kanda, said Wednesday he wouldn’t rule out any steps to address unruly markets if deemed necessary, and that he continues to monitor developments with an extreme sense of urgency. 

Kanda added that he’s keeping in extremely close contact with his counterparts in the US on a day-to-day basis, and both sides agree that excessive currency moves are unwelcome.

There are “clear structural factors” adding to the yen’s decline that come on top of monetary policy, said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. These include the trade deficit and a deficit in the services account, he said.

Karakama said he’s aware of the yen’s declining purchase power not only as an economist but also as a consumer. A recent business trip to Singapore showed him first hand the widening gap between domestic and foreign prices for basic items in daily life from coffee to drinking water, he said.  

–With assistance from Masaki Kondo and Greg Ritchie.

(Updates with analyst comment in seventh paragraph.)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.