One Year After Lifting Negative Interest Rates in Japan: Why the Yen Remains Unchanged

Tried to Strengthen Yen by Raising Interest Rates

Hovering Around 150 Yen for a Year

"Can't Escape Weak Yen Without Productivity Improvement"

"The market has already factored in expectations of a benchmark interest rate hike. If the Bank of Japan does nothing, the weak yen will continue."

Before raising the benchmark interest rate from 0.25% to 0.5% annually in January this year, the Bank of Japan conveyed this opinion to the Japanese government. A senior official at the Bank of Japan told the Nihon Keizai Shimbun that "the Bank of Japan's move to raise the benchmark interest rate over the past year was largely driven by the weak yen." Defending the yen's value was one of the purposes of raising the benchmark interest rate.

On March 19 last year, the Bank of Japan exited negative interest rates and began normalizing monetary policy. Four months later, it raised the benchmark interest rate to 0.25% annually, and this year it raised it to 0.5%, the highest in 17 years. Meanwhile, the U.S. Federal Reserve (Fed) lowered its benchmark interest rate. In March last year, the rate was 5.25-5.5% annually, but it has recently been reduced to 4.25-4.5% annually. The interest rate gap between the U.S. and Japan has narrowed by 1.5 percentage points.

This is a factor for the yen's value to rise. However, the yen's value remains unchanged. On the 25th, in the Tokyo foreign exchange market, the yen-dollar exchange rate moved around 150.6 yen per dollar. Compared to March 18 last year (149.1 yen per dollar) just before the Bank of Japan turned to a policy of raising the benchmark interest rate, the yen's value has actually fallen. In September last year, the yen-dollar exchange rate once fell to 139.5 yen per dollar but eventually returned to its previous level.

Japan expected that raising the benchmark interest rate would increase the investment appeal of Japanese assets such as government bonds, leading to capital inflows into Japan and a rise in the yen's value, but the reality was different. The Japanese financial sector believes that the abundant domestic demand for dollars is holding back the rise in the yen's value. A representative example is the enthusiasm for overseas investment through the new small investment tax exemption system (NISA) introduced last year. Last year, overseas securities investments by Japanese investment trust companies and asset management companies increased by about 2.5 times to 11.5066 trillion yen in one year. Japanese people prefer overseas stock markets over domestic ones.

The weakening fundamentals of the Japanese economy are also a factor hindering the rise in the yen's value. Japan's recent consumer price inflation rate (3.0% in February) is the highest among major countries. However, as wage increases do not keep up with price rises, real wages are declining. Real wages in January decreased by 1.8% compared to the previous year. This is why consumption is not increasing. Although Japanese corporate profits have increased, they have relied more on the weak yen effect than on productivity improvements, leading to sluggish domestic demand. There are many criticisms within Japan that the Japanese economy has not yet escaped deflation (continuous price decline).

Ultimately, there are opinions that raising the benchmark interest rate alone has limitations in increasing the yen's value in a state of insufficient economic strength. Shinichi Uchida, Deputy Governor of the Bank of Japan, said in a lecture on the 5th, "If you want higher growth, you need measures to improve (economic) strength itself, such as productivity improvement."

This is a point that provides significant implications for the Korean economy, where the won's value is also struggling amid the recent weak dollar trend.

Tokyo Correspondent Il-kyu Kim