The weak yen phenomenon in Japan in 2024 has reached its weakest level against the US dollar since April 1990, becoming a significant economic issue. What causes this high level of yen depreciation?

Causes of the Weak Yen Phenomenon

1. Interest Rate Difference: The main reason for the yen's weakness is the interest rate gap between Japan and the United States. As of 2024, the US Federal Reserve's benchmark interest rate is set at 5.25-5.50%, while the Bank of Japan (BOJ) keeps its rate at 0-0.1%.
2. Divergent Monetary Policies: While countries like the US are raising interest rates to curb inflation, Japan maintains low borrowing costs to stimulate its economy after prolonged stagnation.
3. Carry Trade: The interest rate difference encourages investors to borrow yen at low rates and invest in higher-yielding assets elsewhere, adding pressure on the yen to depreciate.
4. Inflation Difference: Japan struggles to achieve sustained price and wage increases, whereas the US grapples with controlling price rises amid robust economic growth.
5. Market Expectation Changes: Changes in market expectations regarding the US Federal Reserve's monetary policy contribute to the depreciation of the yen.

Countermeasures

Active responses to the yen's depreciation are still not prominently visible. Some speculate that the Japanese government may be deliberately encouraging a weaker yen. However, if the yen's value falls further, it could have significant global economic impacts. Based on various global news sources, the following countermeasures have been summarized:

1. Foreign Exchange Market Intervention: Japanese authorities are prepared to intervene in the forex market if necessary, potentially by purchasing yen to support its value.
2. Interest Rate Adjustment: The BOJ may consider raising interest rates to narrow the gap with other major economies, though it proceeds cautiously due to concerns about economic growth and inflation.
3. Gradual Policy Normalization: In March 2024, the BOJ took a small step by raising rates from a negative 0.1% to the 0-0.1% range. Further adjustments may be considered based on inflation outlooks.
4. Monetary Policy Communication: Clear communication from the BOJ about future monetary policy intentions can help manage market expectations and stabilize the yen.
5. Economic Reforms: Addressing fundamental economic issues like productivity decline and stagnant wages can contribute to long-term yen strengthening.
6. Fiscal Policy Measures: The Japanese government can implement fiscal policies to support economic growth and complement monetary policy efforts.

It's important to note that while a weak yen benefits exporters and attracts foreign tourists, it also increases the cost of imports such as food and fuel, putting pressure on household budgets. These countermeasures may be limited as long as the interest rate gap persists, and any intervention may slow the depreciation rather than reverse the trend.

The BOJ and the Japanese government are expected to maintain a delicate balance between responding to the yen's depreciation and supporting economic growth while managing inflation. Future policy decisions will likely depend on domestic economic conditions, global economic trends, and actions by other major central banks, particularly the US Federal Reserve.

South Korea's Response Measures to the Weak Yen Phenomenon in 2024

In response to Japan's weak yen phenomenon in 2024, South Korea is considering various countermeasures:

1. Trilateral Cooperation: South Korea is addressing currency issues through trilateral talks with the United States and Japan. The finance ministers of the three countries have expressed "serious concern" over the sharp depreciation of the South Korean won and the Japanese yen.
2. Close Monitoring: The Bank of Korea (BOK) is closely monitoring the situation to prevent excessive depreciation of the won relative to economic fundamentals. BOK Governor Rhee Chang-yong has noted the indirect impact of the yen's depreciation.
3. Preparedness for Intervention: South Korean authorities indicate that they have the resources and tools to respond to domestic currency volatility, showing their willingness to intervene in the forex market if necessary.
4. Economic Policy Adjustments: The government is prioritizing economic recovery that can be felt by the public, focusing on supporting vulnerable sectors of the domestic market, such as small businesses.
5. Foreign Exchange Market Reforms: South Korea is pushing for reforms to make its forex market more open and competitive. Starting from July 2024, foreign financial institutions will be allowed to participate in the domestic forex market.
6. Supply Chain Stabilization: The government has established a Supply Chain Stabilization Committee to address related issues, which can help mitigate some of the impacts of the weak yen.
7. Monitoring Export Competitiveness: South Korean officials are carefully examining the impact of the weak yen on export competitiveness, especially in sectors where South Korea and Japan have similar export profiles, such as petrochemicals, automobiles, shipbuilding, and machinery manufacturing.

These measures demonstrate South Korea's proactive approach to addressing the weak yen issue. However, the effectiveness of these strategies may be limited as long as the interest rate gap between Japan and other major economies persists. South Korean policymakers continue to face challenges in maintaining a balance between currency stability, economic growth, and competitiveness in the international market.