At more than 144JPY for €1 (as for 1 USD since the two currencies continue to approach parity) during the week, the Japanese yen reached levels it had not experienced for several years. Monetary policy has a lot to do with that.
While the substantial rise in inflation in the United States suggests a Fed that will increase its key rates repeatedly and that the European Central Bank will do the same, the Bank of Japan will not follow them.
In Japan, inflation remains under control, rising to just under 2.6% in July. After years of fighting deflation, this level is not likely to worry Tokyo particularly. The result: the Japanese 10-year-old is trading at around 0.25%, while its American equivalent is about 3.45%, a 3.2% gap that attracts investors to the United States rather than the country of the rising sun. This largely explains the weakness of the Japanese yen.
But the currency’s weakness is also explained by the fact that the current Japanese account, which has traditionally mainly been profitable, has been in the red for about a year and has just posted the most significant deficit on record in August.
In question, the rise of energy prices. Poor in energy resources, having shut down most of its nuclear production since the Fukushima disaster, and having just like Europe put in place sanctions against Russian hydrocarbons, Japan is suffering the full force of the energy crisis and is paying very dearly for its energy. The weak yen further reinforces this phenomenon.
This complicates the Bank of Japan’s strategy. If they’re going to live with a very weak yen, it’s also because they know it offers their companies a significant competitive advantage. Enough to support economic activity in the country through exports. However, in light of foreign trade figures, this advantage is insufficient to compensate for the damage caused by the surge in energy. The Bank of Japan may eventually intervene to help the yen.
Japan’s assets, which are currently primarily abandoned, have significant potential for medium and long-term gains and are, in any case, a good diversification for any portfolio. Japanese stocks and bonds continue to integrate all of our portfolios.
