Mirna Fahmy – Diplomatic Inside

Since 2021, Japan’s economy has been diverting and scrambling for some changes to ignite growth.

The Japanese yen has been on a continuous slide since early 2021, losing more than one-third of its value against the US dollar over the past three years. After freezing at 110 for quite a time, the yen reached a multi-decade low of 160 yen to US$1 and 171.79 against the euro on April 30, 2024. This marks the yen’s lowest value against the dollar since 1986 and its lowest value against the euro ever.

For almost seven months since January 2024, the Japanese yen started to get sharply depleted against the USD. This, of course, has instigated tourism to loom in the country; as for foreigners, expenses in Japan will be cheaper, making the country encounter a problem called “over tourism” this year.

Over the period of 1995 to 2023, Japan’s inflation was 0.0% and the prices were very low, igniting deflation. On the other side, the United States (U.S.) has been battling with high inflation after COVID-19, whereas the prices of goods started to rise vigorously. Japan wanted to veer off the pressure of deflation and weak Gross Domestic Product (GDP) growth. That would require Japan to acquire a risky action to raise its inflation and raise a bit the prices of its goods to match up the high prices of the imported goods, depreciating its currency’s value.

Not to mention, Japan relies heavily on food imports from the rest of the world to feed its population. In fact, only 39% of the food consumed within Japan is produced there, so it’s important for them to import food and drink goods from all over the world, including the UK, Asia For Educators at Columbia University stated.

The amount of land in Japan suitable for agriculture is insufficient to produce enough food for Japan’s large population because most of the country’s lands are susceptible to earthquakes and other natural disasters since it is made up of groups of lands.

Rising wages would be essential in this steep change, as wages have been low as well over decades.

Thus, the Bank of Japan (BOJ) sat out the post-COVID global central bank hiking cycle, making the weak yen simply a product of monetary policy divergence. The hiking cycle includes raising high interest rates, whereas Japan raised its interest rate from 0.0% to 0.25% to curb the yen’s slide against the U.S. dollar in late July 2024.

While the BOJ has only just begun to ease off its intense monetary stimulus, the US Federal Reserve (Fed) has been years into a tightening cycle, raising interest rates aggressively. This wide gap in interest rates puts pressure on the yen, according to Barrons.

Trusting the stagnating 0.0% interest rates, AXIOS explained that investors borrow cheap yen in Japan and buy higher-yielding assets in other countries with predictable returns, such as U.S. stocks (primarily Big Tech names) and bonds.

Economically speaking, a higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for the corporation, which could be reflected in a lower stock price.

On August 5, 2024, Japan experienced a financial turmoil in the global market known as the “Monday Black Market.” The events that led to that were particularly because of the significant drop in the stock.

Japan’s Nikkei 225 index experienced its most severe decline since the infamous “Black Monday” of 1987, plummeting by 12.40% in a single day. This drop was part of a broader sell-off in global markets, triggered by fears of a potential recession in the United States, which affected investor confidence worldwide.

Panic selling and market reactions were triggered, inciting circuit breakers to be activated in both Japanese and South Korean markets, reflecting widespread fear and uncertainty. The sharp decline in stock prices not only destabilised Japan’s economy but also sent shockwaves through global markets, causing declines in Europe and the United States as well.

There was an increased demand for safe havens. As the yen strengthened against the dollar amid the market chaos, investors sought safe-haven assets. This shift often leads to increased activity in black markets, where individuals trade in currencies or commodities that are perceived as more stable during times of economic instability. This will also have effects on the increased activation of black markets, whereas traders will begin betting on the future direction of the yen and Japanese stocks, benefiting some individuals.

Following such economic shock waves, the country’s yen gained its value against the dollar, recording around 147. Despite the country’s benefit, many countries whose economies are unstable and get dashed easily recorded millions of losses in their stock markets.

Japan is one of the largest economies in the world and has a doting share of the Global Foreign Exchange Reserves of about 5.5 percent. However, the country is still grappling with many intricate issues that might corner the country at freezing points in terms of growth.

The country’s population has been in austere decline for eight consecutive years, pushing the proportion of the elderly up rather than the youngsters. The labour force is in turn disturbed and is suffering shortages, weakening the industries power of productions, besides the probability of “societal extinction,” as it was once described by Japan’s Prime Minister Fumio Kishida.

Kishida’s government, which has been in office since 2021, has launched a dating app in June 2024 to encourage the marriage of couples with the aim of boosting birth rates by all means. The government even grants new parents in Japan to receive a Childbirth and Childcare Lump-Sum of 420,000 yen upon the birth of their child.

Such turmoil won’t emancipate Kishida from any guilt in front of the severely disciplined country as Japan. As an apology and responsibility, Kishida has announced on Wednesday August 14, 2024 during a press conference that he will step down and not run for his party’s election as soon as a new leader is elected after the September elections.

Kidhida’s popularity is witnessing a significant decline according to opinion polls despite his efforts on the combat of the corruption funding scandals within the party. In his resignation speech Kishida spoke about the achievements of the government under his term in increasing wages and investment, improving energy policy, working to address the country’s low birth rate, in addition to strengthening Japan’s defence capabilities. He finalised  his words that “Politics can’t work without Public trust”.

After the resignation of Shinzo Abe in 2020, who has been in office since 2012, from the same party, which is the Liberal Democratic Party (LDP), Yoshihide Suga came into office till 2021. Then Kishida tuned in in 2021 till now from LDP.

In reference to economic sites and analysis, there is a USD/JPY forecast for 2025, whereas the rate should be traded below the 120 yen level in the coming years.