Now might be a good time to book that trip to Japan you’ve been dreaming of because your loonie is going to go a lot further than it used to.
What happened: The value of the Japanese yen fell to a 34-year low after the Bank of Japan said it would keep interest rates at a target of zero percent to 0.1%.
- Since 2020, the value of the yen has fallen by around 35% relative to the U.S. dollar and 33% against the loonie.
Why it’s happening: Japan has kept interest rates near zero (and for a time, below zero) which has depressed the yen’s value by causing investors to sell yen and buy currencies of countries with higher rates.
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Japan’s low-rate policy rates mean the returns on investments denominated in yen, such as government bonds, are also low, making them less attractive to investors.
- Investors have shifted to buying other currencies, like U.S. or Canadian dollars, to purchase higher-yielding assets like U.S. Treasuries.
Why it matters: Japan is the fourth-largest economy in the world and a key hub in important industries, particularly cars and electronics. The effect of the weak yen impacts everyone connected to those sectors’ supply chains by making Japanese exports cheaper.
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For people in Japan, the cheap yen has been a mixed blessing. The Bank of Japan’s policy has staved off crippling deflation, boosted growth, and helped tourism flourish.
- At the same time, imports have become more expensive and the cost of living has jumped.
What’s next: Japanese policymakers may need to intervene to stop the slide of the yen in the near future if it continues to weaken, but the decision won’t be an easy one — doing so will raise the costs of servicing the country’s debt (the largest among developed economies), which already consumes around a quarter of Japan’s annual budget.—TS
