– Penned by Varnika Gupta

The rapid depreciation of Yen against the US Dollar, combined with rising fuel costs has led to a sharp increase in prices. The Japanese yen has depreciated at an unprecedented pace. After trading at 104 to the US dollar at the start of 2021, the yen began to weaken, a trend that accelerated in 2022. By June, the yen was around 135 to the US dollar, a low not seen since October 1998. This sharp decline has built a pressure on household balance sheets, as yen based import prices are surging at record level. This Macroscan we explore the reasons for the declining value of Yen and its effect on the overall economy.


The divergence in monetary policies between Japan and the US, together with the growing concern that the interest rate differential between the two nations is set to widen, are the main causes of the yen’s depreciation.

Since the 2008 financial crisis, central banks have actively bought government bonds and, through quantitative easing, have injected liquidity into the markets. Such measures have had some success, with the exception of Japan, and the US Federal Reserve has ended its quantitative easing programme. The Fed is also moving to normalize its monetary policy, such as by raising interest rates in March 2022.

Meanwhile, the Bank of Japan(BOJ) is continuing its quantitative easing policy and shows no signs of changing its monetary policy. Instead of altering its stance, the BOJ is engaging in market operations including fixed-rate purchase operations, where it controls interest rates by buying an infinite number of Japanese government bonds once the rate exceeds a certain threshold.

The BOJ seems determined to keep up the huge supply of liquidity in order to keep interest rates low, despite the Federal Reserve turning to tightening to normalize its policy. Naturally, this will lead to the yen’s depreciation. Unfortunately, in 2022, a global inflationary trend accelerated, further accelerating the yen’s collapse.

Prices started to increase in the second half of 2021, propelled by hopes for a post-COVID-19 economic recovery. Following Russia’s invasion of Ukraine in February 2022, the cost of food and crude oil skyrocketed. The government of President Joe Biden is concerned about inflation because the US public is sensitive to price increases and because midterm elections are coming up in November. Controlling inflation has emerged as a top concern for the White House, and further increases in petrol prices are expected to erode popular support.

Currently, the market is indicating that the Fed will increase interest rates more quickly. If that happens, the difference in interest rates between Japan and the US will increase, making it simpler to sell yen.


Japan’s postwar economy was mostly driven by export-led growth, with export industries serving as the main drivers of expansion. Companies selling products abroad for dollars needed to convert these dollars into yen to pay the wages of their domestic employees. For this reason, the demand among exporters to sell dollars for yen was a constant presence during the years when exports were vigorous.

Since the 1990s, however, Japan’s manufacturing industries have struggled to shift to high value-added products, and they have been forced into price competition with South Korea, Taiwan, China, and other emerging economies. As a result, Japanese businesses quickly moved their production plants offshore to reduce costs, which hollowed out the Japanese economy. These offshore subsidiaries kept the foreign currencies they had earned. Since these earnings were not transferred to Japan, recent years have seen a decline in yen purchases based on the actual demand of export businesses. Yen’s current fall is largely explained by structural factors resulting from a Japanese economy that has turned sluggish from the diminished competitiveness of export industries. Most Japanese people once believed that the depreciation of the yen was a thing to be welcomed, calling for policies to induce the weakening of the currency. But the current situation is quite different.


One of the obvious channels which the depreciation will affect the economy is through trade of goods.

The impact is frequently discussed in textbooks with the presumption that export prices are fixed in the exporting nation and that the effects of exchange rate fluctuations are mirrored in export prices in the destination nation. For instance, when Marshall-Lerner conditions are derived, that is the underlying assumption. In this scenario, it is anticipated that export volume will rise as consumers’ costs decrease in the target market.

However, in the case of Japan, that does not seem to be the case. As shown in the above line chart, export prices in yen-terms are far from being stable: it has moved much more closely to the exchange rate fluctuations than the export prices in contract currency-terms.


With weakening Yen, the stock of Maruti Suzuki India has gained over 6.5% over last month. This is attributed to the fact that the company sources raw materials from Japan. This is expected to help Maruti to lower the drag on the operating margin due to cost inflation. Over 15-16% of the company’s raw material cost, mainly related to electronic components, is denominated in yen.

After adjusting for export earnings, Maruti’s operating margin could be higher by 80-100 basis points than the consensus forecast of 8-8.2% margin for the March 2022 quarter. According to the Bloomberg estimates, Maruti’s FY23 projected margin is 9.6%. If the weakness in the yen persists, it may offer room for margin upgrade.


The difference in monetary policies of Japan and US and the indication of widening of the differential interest rate has taken a hit on the Japanese Yen, as it plunges below the level last seen in 1990’s. With the sharp decline, the average household is feeling the bite from higher prices for imports from energy to food. Moreover a direct impact has been seen on trade of goods as depreciation of Yen will be reflected in higher import prices and lower sales of imported goods, which will be a burden on importing industries. However, for the impact on the trade of services, decline in spending by outbound tourists and increase in spending by inbound tourists would have a positive impact on the economy. Summing up, the decline of Yen has led to hampering Japan’s post COVID recovery and clouding the Japanese economy. Further down the lane, if the situation persists, the Japanese Government will have increased annual interest payments, which may impact tax collection.


Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

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