June 24, 2024: The recent decline of the Japanese yen, nearing critical levels against the US dollar, poses significant implications for both Japan and the broader Asian and emerging markets, warns the CEO of one of the world’s largest independent financial advisory and asset management firms.
Nigel Green of deVere Group issued the warning as the yen reached 159.94 per US dollar in early trading, approaching the psychologically significant 160.00 mark.
This sharp decline has prompted familiar warnings from Japanese officials about “excessive” volatility, often a precursor to potential market interventions.
The authorities are believed to have intervened previously when the yen reached 160.245 per dollar in late April.
Nigel Green says: “The ongoing depreciation of the yen is causing ripples across emerging markets, placing increasing stress on Asian currencies.
“These currencies are under pressure to depreciate to maintain their export competitiveness, which in turn affects the stability and growth prospects of these economies.
“The yen’s weakness contributes to imported inflation in Japan, adding pressure on the Bank of Japan (BoJ) to reconsider its ultra-loose monetary policies.”
The minutes from the BoJ’s last meeting indicated considerable discussions about tapering bond purchases and potentially raising interest rates.
The deVere Group CEO also cautions about the limitations of unilateral interventions.
“Efforts to prop up the yen are not only expensive but potentially ineffective,” he notes.
“Unilateral interventions can temporarily stem the tide but often fail to address underlying economic issues. Sustained intervention requires substantial foreign exchange reserves, which can be quickly depleted, leading to minimal long-term impact.”
The yen’s depreciation is a double-edged sword for Japan. While it boosts the competitiveness of Japanese exports, it also increases the cost of imports, exacerbating inflationary pressures. This scenario places the BoJ in a challenging position as it seeks to balance stimulating economic growth with controlling inflation.
Nigel Green continues: “Emerging markets in Asia are particularly vulnerable to these dynamics. As the yen weakens, countries like South Korea, Malaysia, and Thailand might feel compelled to let their currencies depreciate to protect their export markets. This could lead to a cycle of competitive devaluations, destabilising regional economies.
“The interconnected nature of global markets means that currency movements in one major economy can have far-reaching consequences,” he goes on to say.
“Investors and policymakers must remain vigilant and adaptable to face these turbulent waters. Diversified investment strategies and prudent risk management are essential to mitigate potential adverse effects.”
He concludes: “Investors around the world are on alert for a possible yen intervention which is likely to put the squeeze on other Asian currencies and impact global markets.”