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Why Japanese Yen Keep Falling?

By Wong Kon How

For tourists it is good news travelling to Japan, you have great spending power, you can exchange more Yen this time. However, with the weakening of Yen, the local Japanese will have to bear the cost of inflation.

The Japanese Yen has declined at the fastest rates since the start of Covid. It could be the weakest currency among the developed countries. The biggest reason is the move toward higher interest rates in the U.S., making dollar-denominated assets more attractive for investors seeking higher returns.

The Bank of Japan maintains its commitment to maintain rock-bottom interest rates to boost its already challenging economy. As a result, the yen has weakened dramatically against the dollar and others.

What does the weak yen mean for the economy? Historically Japan has welcomed a weakening of the yen as it helps its exports. Major Japanese exports include electronic equipment and cars.

According to OEC, the top imports of Japan are Crude Petroleum ($38.4B), Petroleum Gas ($31.4B), Integrated Circuits ($17.7B), Broadcasting Equipment ($17.5B), and Computers ($14.5B).

The not too good news is Japan imports a lot from China and the U.S. China at US$151B and U.S. at US$63.1B. From the chart we could see the Japanese Yen has depreciated 38% against China Yuan and 28% against the U.S. Dollar. Meaning the locals will have to pay at least 38% more for their flour today compared to 2020.

A sharply weaker yen amplifies that pain. The average household is also feeling the bite from higher prices for imports from energy to food. It is a dilemma for the Japanese, they need the export but surely hope not to take on too much of the inflation.

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