To The Moon

Ten years ago, a Japanese with 10,000 yen could buy a $132 product in the United States, now a product of only $71. Conversely, Japan has become cheaper and cheaper for tourists. Ten years ago, you only got 100 yen for a euro, now it’s 145 (100 yen/141 US$). Until recently, tourists could not take advantage of this because the borders remained closed due to corona. Meanwhile, tourists are welcome again. In 2019, 32 million tourists came to Japan spending about 5 trillion yen. Next year, tourists in Japan are likely to spend 6.6 trillion yen. One of the successes of Abenomics is the annually-growing number of foreign tourists. Only corona briefly threw a spanner in the works. Instead of the planned 40 million tourists in 2020, it became 4 million. By 2030, the country is targeting 60 million foreign visitors. Time to shop in Japan.

Japan has long tried to weaken the yen to boost the economy. A weaker yen would also help to push up inflation. Despite the many billions spent on buying up foreign currency, both goals were never achieved, until the year 2022. Now the yen is weakening so fast that the Bank of Japan (BoJ) is even intervening in the currency markets. The weak yen is importing inflation. In October, core inflation hit its highest level in 40 years. In light of all the inflationary violence around the world, this may look shocking, yet core inflation is now just above 3.5 percent year-on-year. It is the seventh month in a row that inflation has been above the BoJ’s 2 percent target.

There are several reasons why inflation is succeeding now. One is the weakening of the yen. The main reason is due to the increased contrast between the policies of other central banks including the Fed and the BoJ’s Yield-Curve-Control (YCC) policy. Japanese women (in Japan, women are about wealth) therefore feel comfortable borrowing in yen. After all, interest rates will stay low for longer, and, as a result, the currency seems to have only one way to go and that is down. Ms. Watanabe borrows in yen and deploys the proceeds in higher-yielding currencies. In times of crisis, some of these speculative positions are normally sold (exactly the reason why the yen is normally a safe haven), but this time monetary policy is actually boosting foreign investments.

The YCC policy was launched in 2013 (at the start of Abenomics) and is also known as Quantitative and Qualitative Monetary Easing. Each year, the BoJ would buy 50 trillion yen, in October 2014 it became 80 trillion yen. In 2016, the BoJ cut interest rates from zero to -0.1 percent, and YCC was launched in September 2016. By doing so, the BoJ committed to the price (the interest rate level, namely 0.25 percent) and therefore had no influence on the quantity to be bought up (basically unlimited, so the 80 trillion yen quantity to be bought up became irrelevant). YCC’s original objective was to get long-term interest rates up, thereby ensuring a steep yield curve. Indeed, negative interest rates were not good for Japanese banks and YCC could stop this. The downside of YCC, however, is that it is pro-cyclical. This became really clear in 2020 at the start of the corona pandemic. The crisis situation pushed down interest rates, forcing the BoJ to stop buying bonds (while outside Japan central banks started buying up en masse). Inflation, also in Japan, is pushing up interest rates, forcing the BoJ to buy more and more bonds. This is while outside Japan central banks are actually selling bond positions.

Japan’s unconventional monetary policy has been made possible by Haruhiko Kuroda, the BoJ governor. His term ends in April 2023. Kuroda came in at a time when the BoJ was doing too little to defuse the crisis for years. The YCC policy is unsustainable in the current inflation dynamics, especially if counterproductive yen support has to be provided by buying up the yen while at the same time procyclical YCC policy puts pressure on the yen. YCC and currency interventions cannot be combined. And if something cannot coexist, it will have to stop. That presents opportunities for the yen, which has now slipped to levels last seen in 1970. Japan is now a developed country, with a currency of an emerging country.

Japan’s unit labor costs are now lower than China’s. In a country where GDP per capita is four times higher than in China, labor costs should not be lower than in China. Monetary policy, therefore, needs a shake-up. According to Kuroda, the policy will not change in the next two to three years, but that statement does not carry much weight, given the governor’s departure in March 2023. By the end of 2023, the Japanese yen could well emerge as the big winner.