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The Bank of Japan is the only central bank in the world which has continued with its negative interest rates, even as the yen has hit levels previously seen during the Asian financial crisis in 1998. While a weak currency was expected to boost Japan growth by way of higher exports, recently released data shows that the country’s GDP shrank 0.3% in August compared to July as exports to China and Europe declined.
The world’s third largest economy saw muted domestic demand, while global headwinds weighed on exports, as per the Japan Center for Economic Research. Meanwhile, Japan’s yen has become the worst-performing Asian currency in 2022, and the recent forex intervention by authorities has done little to shore up the yen.
Japan growth trajectory
For the month of August, Japan’s exports to Europe fell by 10.3% and to China declined by 7.5%. Data shows that the decline in goods was mainly for general machinery and electrical equipment. However, Japan’s exports to the US jumped by 12.1%. Private consumption in Japan slipped 0.1%, and investment in the private sector saw a decline of 0.2%, the Japan Center for Economic Research said.
In September, Japan’s factory activity slowed down, with the au Jibun Bank Japan Manufacturing Purchasing Managers’ Index falling to a seasonally adjusted 50.8 in September from a final 51.5 in August. This was the weakest growth rate for the manufacturing sector since January 2021. A global slowdown is impacting Japan, with September seeing new orders falling at the fastest pace in two years.
“New business from customers in China, South Korea, Europe and the US reportedly dropped. Subsequently, Japanese manufacturers cut their production volumes at the end of the third quarter for the third successive month,” au Jibun Bank said.
While there are concerns, inflation in the world’s third-largest economy is well below other developed countries. Japan’s core consumer inflation in August quickened to 2.8%, well above the Bank of Japan target of 2% and recording the fastest pace in nearly eight years.
Macro headwinds for Japan are likely to continue in the mid-term, and the International Monetary Fund in its latest economic outlook report sees Japan grow by 1.7% in 2022, and by 1.6% in 2023. “Japan’s policy rates could continue to remain low, given the low underlying core inflation and weak wage growth,” said the IMF.
The IMF’s sentiment over rate hikes in Japan was cemented by Bank of Japan Governor Haruhiko Kuroda who on October 12 vowed to continue with the loose monetary policy. “We have to continue our monetary easing until we achieve the 2% target in a sustainable and stable manner,” Kuroda said during an event.
Weak yen and Japan growth
Last month, Japan spent 2.84 tn yen ($19.7bn) to arrest the yen’s decline, which had slipped close to 146 against the dollar, the level at which Japan had intervened in the forex market back in 1998. The currency improved to as much as 140.36 against the dollar after the intervention. But the recent comments by Kuroda and the US Fed’s hawkish stance have sent the yen past the critical threshold of 146 against the greenback.
The yen dropped to a 32-year low of 147.65 against the dollar on October 13 as US consumer prices rose sharper than expected, indicating that the US Fed may not ease it monetary policy anytime soon.
On the other hand, Japan’s currency reserves have fallen by $54 bn to $1.2 tn, the lowest level since the end of March 2017. “With more than USD 1 trillion of currency reserves, much of it in US dollars and US Treasuries, Japan can afford to intervene until other factors take effect. This “sterilised intervention” is not without risks as it may impact the spread between JGBs and US Treasuries,” said Swiss bank Lombard Odier.
The weak yen was expected to increase exports, but the country’s current account surplus shrank to a record low for the month of August, largely due to rising energy prices.
Market experts are of the opinion that it is not the fundamentals of Japan which are eroding the yen’s value against the dollar, but the rally seen in the greenback currency has left little room for the yen to improve.
“Given the limited scope of the Bank of Japan’s contemplated monetary action, the fate of the yen may depend on forces external to Japan,” writes Michael Hayes, Executive Director at MSCI Research. “Investors exposed to Japan and the yen may need to look beyond Japan to identify the important risk factors for their portfolios.”
Apart from aiding exports, the weak yen was expected to spur tourism in Japan. More recently, Japan completely opened its borders to tourists by easing Covid-19-induced travel restrictions.
“Inbound consumption is unlikely to recover to pre-pandemic levels immediately without tourists from China, who are still subject to exit restrictions as part of their zero-Covid policy,” said Naoki Kamiyama, Chief Strategist at Nikko Asset Management.
