Why is the Yen So Weak?
Japan is one of the most industrialized countries in the world. It also has a strong economy due to advanced technology and a highly skilled workforce. Japan grew its economy after the second world war when it transformed itself into an industrial powerhouse.
Many countries experiencing a weak currency often experience high levels of inflation. However, while the Japanese yen has remained weak for so long, Japan has experienced low inflation rates. So, we want to find out why the yen is so weak and why Japan’s inflation rates are so low.
Why is the Japanese Yen So Weak?
Despite Japan being an industrial powerhouse, its currency has remained weak for the longest. The following are some of the factors that have led to the prolonged weakening of the Japanese Yen.
1. Monetary Policy Divergence
The main reason why the Japanese yen has remained weak is because of the divergence in monetary policies. The Bank of Japan (BOJ) has been implementing loose monetary policies that have led to the weakening the yen against other currencies.
Because of Japanese low-interest rates, the U.S. moved towards higher interest rates making dollar-denominated assets more attractive to investors. The aftermath has been the weakening of the Japanese yen against other currencies.
2. Trade Deficit
The other reason why Japan's yen is so low is due to the trade deficit. Japan has been experiencing more imports than exports for several years resulting in the trade deficit. The causes of trade deficit are high energy imports like oil and natural gas.
Japan relies heavily on imported energy resources such as oil and natural gas. The country doesn’t have enough energy reserves and as such, it can only import. Higher imports than exports have resulted in the weakening of the Japanese yen against other currencies.
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3. Market Speculation
Market speculation has also resulted in the weakening of the Japanese yen. For a very long time, the Japanese yen has remained relatively weak. Consequently, traders have been short-selling the yen leading to its further weakening. If the trend continues, the yen is likely to weaken further.
What is Japan’s Inflation Rate?
Unlike many countries, Japan has maintained low inflation rates for the longest. The annual inflation rate in Japan was 3.5% in April 2023, an increase from March’s inflation rate of 3.2%. The rise in inflation rates was attributed to an increase in food prices. However, Japan’s inflation rates have remained so low for the longest.
Why is Japan's Inflation Rate So Low?
Although the Japanese yen has remained very weak for long, Japan has experienced low rates of inflation. The following are some of the reasons why the rate of inflation has remained so low in Japan:
1. Deflationary Mindset
For many years, Japan has been grappling with a deflationary mindset. Deflation means there is a decline in the price of goods and services. Consequently, consumers delay making purchases anticipating further price drops resulting to low rates of inflation in Japan.
2. An Aging Population
Japan is one of the countries with a high number of aging population. The rate of birth is low but life expectancy is high. A large percentage of the aging population has led to slow economic growth because of low consumption. Consequently, the demand for goods and services is low in Japan.
And since demand and supply affect the price of goods and services, it becomes challenging for businesses to raise prices leading to low inflation rates.
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3. Monetary Policies
The Bank of Japan (BOJ) has implemented various monetary policies to maintain low inflation rates in Japan. For instance, BOJ has implemented policies such as quantitative easing and low-interest rates to counter the prices of products and services. Such policies result in low inflation rates in Japan.
4. Low Wage Growth
While Japan has high literacy levels and a highly skilled workforce, wage growth has stagnated for a long period. When there is no growth in workers’ wages, it limits consumers’ purchasing power leading to low demand and consequently low inflation.
Summary of Why the Yen is So Weak
The Japanese yen has remained weak for so long while inflation rates are so low. Factors like trade deficits and monetary policy divergence have led to the weakening of the yen. On the other hand, an aging population, monetary policies, low wage growth, and monetary policies have resulted in low inflation rates in Japan.
