By Noriyuki Suzuki,
The yen's recent weakening may not be as rapid as last year when it lost around 20 percent of its value relative to the U.S. dollar, but the prospect of it staying longer at current levels is already a cause for alarm for Japan Inc. and consumers.
The yen is in the 143 zone to the U.S. dollar, far from around 130 that major Japanese firms expect the currency pair to average in the current business year to next March. The euro has also hit a 15-year high versus the yen near 157.
While Japanese authorities say they are closely monitoring forex developments due to the importance of stable currency moves that reflect economic fundamentals, the yen's recent weakness is largely due to the divergence of monetary policies between Japan and its peers in the United States and Europe.
Bank of Japan Governor Kazuo Ueda has been taking a neutral stance on the yen's fall of late, calling it "positive for some sectors but negative for others."
But consumers are feeling the lagging effects of the yen's precipitous fall since last year, as companies continue to pass on higher import costs to consumers, and Ueda has acknowledged that rising prices are "big burdens" on households.
The yen's depreciation may not be as rapid as when Japanese authorities intervened in late 2022, but analysts say the weak trend will likely persist in the coming months, at least until financial markets are convinced that the U.S. Federal Reserve and the European Central Bank will pause raising interest rates.
Some say the weaker yen can prompt the BOJ to tweak its monetary policy if the nation's inflation becomes more entrenched.
"For the time being, the yen is expected to stay at current levels relative to the other two (euro and dollar), and it won't be until October or later that we will see a reversal of the trend and the yen will rise," said Koji Fukaya, a fellow at consulting firm Market Risk Advisory Co.
"The dollar staying around 140 yen is already a headache for many Japanese firms, particularly importers," he added. "Inflation may slow, but relative price levels will be high, and this is a severe blow to households."
Japanese firms expect the dollar to average 127.61 yen for fiscal 2023, according to research firm Teikoku Databank.
Among some 11,000 companies that gave valid responses, importers set their assumed exchange rate about 1.6 yen higher than exporters on average, the survey showed, with the biggest gap of over 7 yen seen between wholesalers and construction companies.
In the BOJ's Tankan quarterly business survey covering around 9,200 firms, the assumed rate for the dollar-yen pair was at 131.72 yen and the euro-yen at 138.29 yen as of March. The central bank is set to release its next survey in July.
So far, markets are upbeat. Japan has seen share prices rise to levels unseen in three decades and the yen weakening, aided by the BOJ's ultralow rate policy.
"Japan is an advanced economy least hit by headwinds with a revival of inbound tourism and the negative impact of COVID-19 rather limited," Fukaya said. "But the kind of risk-on mood seen recently will not last over the medium term."
Exporters tend to be the major beneficiary of a weak yen that inflates their overseas profits in yen terms. On the flip side, importers need to shoulder higher costs.
Russia's war in Ukraine and a global economic recovery from the COVID-19 shock have meant higher fuel costs. Adding to the woes of resource-poor Japan is the yen's recent depreciation.
"There are views that (Japan) is accepting of the weaker yen partly because it is boosting stocks. But there is this undeniable logic that higher cost burdens squeeze the economy as a whole," said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc.
"The Fed's policy stance (to seek higher interest rates) can keep the momentum for yen weakness. With that in mind, we should be on guard against the scrapping of yield curve control in July when the BOJ releases its quarterly outlook report and likely revises upward its inflation forecast," Maruyama added.
Consumer inflation is well above the BOJ's 2 percent target for the 14th straight month, but the BOJ under Ueda, who became governor in April, has repeatedly shot down speculation of dialing back monetary stimulus soon because inflation is expected to slow.
Still, one BOJ board member said while it was appropriate to wait "a little longer," the time was ripe to consider revising its yield curve control program due to its hampering market functioning, according to minutes of the central bank's policy meeting in April.
The BOJ sets short-term interest rates at minus 0.1 percent and guides 10-year Japanese government bond yields to around zero percent, with a 0.5 percent cap.
"Any rapid yen weakening, like toward 145 (to the U.S. dollar) in the short-term, might trigger an early (policy) adjustment as the BOJ is in favor of a stable yen move in tandem with the fundamentals," said Daiju Aoki, chief investment officer for Japan, at UBS SuMi TRUST Wealth Management.
Japan intervened in the currency market after the yen breached 145 to the U.S. dollar in September. It carried out three yen-buying, dollar-selling operations in September and October, spending over 9 trillion yen ($62.6 billion).
As the yen's weakness also trimmed its current account surplus, Japan was removed from a U.S. watch list that monitors trading partners for potentially unfair foreign exchange practices for the first time since 2016.
