[Seungseop Song's Financial Light] Why Isn't the Yen's Value Rising?

Despite the Base Rate Hike, Persistent 'Enjeo'
Fell to 800 Won per 100 Yen for the First Time in 8 Years
'Ultra-Easy Policy' Remains Despite Rate Increase
Interest Rates Still Low Compared to the US
Real Interest Rates Fall Further Considering Japanese Inflation

The value of the Japanese yen is at an all-time low. There is even a saying that "it's cheaper to travel to Japan than to Jeju Island." But this is strange. Japan has been gradually raising its benchmark interest rates this year. So the value of the Japanese currency should have increased, but the yen depreciation phenomenon continues. At first glance, this seems to be the exact opposite of what economic theory would predict. Why has the yen's value fallen so drastically?

Yen Falls to 800 Won per 100 Yen for the First Time in 8 Years

Incheon International Airport Terminal 1 Departure Floor
[Photo by Yonhap News]

In fact, currency value in international economics is a relative concept. Suppose it used to take 1,000 won to exchange for 1 dollar, but now it takes 2,000 won. Within Korea, 1,000 won still buys the same value whether it's a drink or an extra bowl of rice. However, compared to the dollar, the value has dropped. This is because in the past, 1,000 won was equivalent to 1 US dollar, but now 1,000 won is worth only 0.5 dollars (1 dollar = 2,000 won). This is called depreciation (won weakening) in technical terms.

The term "yen depreciation" (Enjeo) means the same thing. Yen depreciation refers to the phenomenon where the yen's value has dropped significantly compared to currencies like the dollar or the won. For example, in the past, Koreans needed 1,200 won to exchange for 100 yen, but now they can get it for 900 won. This is why traveling to Japan has become more popular. If it used to cost 1,200 won to buy goods worth 100 yen in Japan, but now only 900 won is needed, people can enjoy traveling at a lower cost.

Recently, the yen's value has dropped to the 800 won range per 100 yen. This is the lowest level in 8 years since June 2015. Even in March 2020, it took 1,100 won to exchange for 100 yen. Considering this, the yen's value has dropped significantly through the COVID-19 pandemic.

How Does Currency Value Rise and Fall?

Kazuo Ueda, Governor of the Bank of Japan
Photo by Yonhap News

Why does currency value rise and fall? There are many reasons, but one important factor is the benchmark interest rate. If the US raises its benchmark interest rate, the value of the Korean won falls. This is because a higher US interest rate means higher returns on US deposits. People will want to deposit money in US banks rather than Korean banks. As more people want dollars, the dollar's value becomes more valuable. Conversely, the value of the Korean won, which has a relatively lower interest rate, falls.

So, since the yen's value has fallen, did Japan lower its benchmark interest rate? No. On the contrary, Japan has been gradually raising its benchmark interest rate. On December 20 last year, the Bank of Japan (BOJ) raised the upper limit of the 10-year Japanese government bond yield from ±0.25% to ±0.50%. Simply put, the benchmark interest rate rose by 0.25 percentage points. At the end of last month, they decided to allow this rate to rise to about 1% per year. According to what was said earlier, since Japan's benchmark interest rate rose, the won's value should have fallen, but in reality, the yen's value fell, which is quite strange.

Why did this happen? One reason is Japan's monetary policy. Japan decided to raise interest rates but is maintaining an easing stance. The short-term interest rate, not the 10-year long-term rate, remains at -0.1%. The BOJ also stated that raising rates is "not a normalization of monetary policy but an effort to enhance the sustainability of the easing policy." In other words, although they raised rates slightly, they expressed their intention to continue keeping the benchmark interest rate generally low going forward.

US Benchmark Interest Rates Are High, While Japan's Real Interest Rates Are Actually Low

[Image source=Yonhap News]

This leads to the question: "If the yen is so cheap now, why aren't there speculators?" If the price of an item is much cheaper than usual, speculators aiming for a rebound usually flock in. When demand increases, prices actually rise. If the yen is this cheap, speculators should cause its price to surge, but there is no sign of that happening.

This may be due to the influence of the US. The US interest rates have risen too high. The US Federal Reserve (Fed) has sharply raised rates, unlike the BOJ. The rate was 1.75% in June last year but soared to 5.50% within a year. Although Japan raised its benchmark interest rate slightly, the US benchmark interest rate is much higher in comparison. Because US rates are so high, investors see no need to seek yen.

On the other hand, some say Japan's benchmark interest rate has not actually increased in real terms. Although it appears that the benchmark interest rate has risen, the real interest rate adjusted for inflation has not increased much. NHK reported, "The BOJ announced it would tolerate long-term interest rates rising up to 1%, but the market expects real interest rates to fall due to inflationary effects," adding, "There is also analysis that the yen exchange rate moves according to real interest rates."

Editor's NoteFinance is difficult. It involves confusing terminology and complex backstories intertwined. Sometimes, you need to learn dozens of concepts just to understand one term. Yet finance is important. To understand the philosophy of fund management and to consistently follow the flow of money, a foundation of financial knowledge is essential. Therefore, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those with no financial knowledge can immediately understand these "light" stories, which turn on the "light" of finance for you.