Quick Bites | Japan’s Yen Dips to New Low

The yen fell to a 34-year low against the US dollar last week before strengthening again, leading to speculation that authorities may have followed through on threats to intervene to prevent the Japanese currency from weakening too much.

While markets in Japan were closed for a holiday, the yen briefly traded above 160 to the US dollar, the weakest level since 1990. It sprang back to around 155 yen to the dollar by the end of the trading day in Asia.

The yen has been falling mainly as a result of changing interest-rate expectations. While investors are recalibrating their views on the US Federal Reserve (Fed), pushing back expectations for rate cuts, Japan’s central bank has been reluctant to raise rates as quickly as some traders might have hoped.

Source: Trading Economics 

 

Higher interest rates make investments in a currency more attractive by providing a better baseline for returns. While a weaker yen may benefit Japan’s economy by making exports cheaper, authorities will be wary of letting the currency fall too much on concern that it could trigger financial instability.

Japan may confirm currency market intervention some time after the event; it has been threatening to act for weeks. But the power of such moves is always limited by the country’s reserves, which it has to use to buy yen in the market to push its price up. Thus it usually aims to reinforce market trends, rather than try to reverse the direction of currency.

While the yen is perhaps feeling the biggest impact of the Fed’s higher-for-longer rate stance, other currencies such as the AUD, the euro and the British pound are also affected. The dollar index, a measure of the greenback’s strength against a basket of currencies, has gained 4.3% so far this year.

Trade with Australia

The strength or weakness of the yen has an impact on Australian exporters to and importers from Japan. Japan is the world’s third largest economy, and Australia’s second largest trading partner (after China). The Australia-Japan economic relationship is highly complementary. Australia is seen as a safe and reliable supplier of energy, mineral resources and food, and is a centre for financial and other services. Japan became Australia’s largest trading partner in the early 1970s – a position it maintained for 36 years, until it was overtaken by China.

In FY2022-23, two-way goods trade between Australia and Japan was valued at AUD 143 billion. Japan was our second-largest export market, valued at AUD 115 billion and accounting for 17% of our total exports. In FY2022-23, Australia’s major merchandise exports to Japan included coal (AUD 53 billion), natural gas (AUD 35 billion), iron ore (AUD 8 billion), beef (AUD 2 billion), and aluminium (AUD 1 billion).

On the other side of the trade ledger, in 2022 Japan was Australia’s fifth-largest import source, valued at AUD 27 billion, including motor vehicles (AUD 11 billion), refined petroleum (AUD 4 billion), civil engineering equipment and parts (AUD 1 billion).

In FY2022-23, total bilateral trade in services was valued at AUD 6 billion, with exports valued at AUD 2 billion and imports valued at AUD 4 billion. Australia’s key services exports to Japan include travel, transport, business and insurance/pension services.

 

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