"Lowest Real Value of Yen Since 1970s... Market Intervention Insufficient"

An analysis has revealed that the real value of the Japanese yen has fallen to its lowest level since the 1970s.

Lee Byung-kwan, Deputy Director of the Korea Institute of Finance, stated this in a report titled "Causes of the Prolonged Weakness of the Yen" on the 21st. According to the Bank for International Settlements (BIS), the real effective exchange rate of the yen recorded 64.45 as of the end of May (2020=100, based on 27 countries), marking the lowest level since the 1970s.

The real effective exchange rate indicates the extent to which a country's currency has real purchasing power compared to foreign currencies. It evaluates the relative exchange rate level between the base period and the current period; a value above 100 is considered overvalued compared to the base year, while a value below 100 is considered undervalued.

On the 14th, an employee is organizing Japanese yen at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Lee said, "The value of the Japanese yen has fallen to a level unprecedented since the postwar period," adding, "When compared in real terms, the yen is weaker than the fixed exchange rate of 1 dollar = 360 yen maintained before the introduction of the floating exchange rate system in 1973."

The report noted that the yen began its weakening trend starting from the end of 2012.

Lee analyzed that three events acted as background factors: the sharp increase in trade deficits since 2011, the Great East Japan Earthquake, and quantitative easing under Abenomics. After the COVID-19 pandemic in 2020, inflationary pressures increased, prompting major central banks to raise policy interest rates consecutively.

However, Japan did not raise its policy interest rates despite growing pressure to do so for domestic demand recovery, which widened the interest rate gap with the United States and further strengthened the yen's weakness. Lee observed, "Considering that real interest rates are in negative territory, if speculative yen selling begins, capital outflows from Japanese households could accelerate significantly."