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Japan - The Land of Falling Yen

In 2022, every trading day has seen at least one interest rate hike. This is based upon that on average there are 210 trading days to date and compared to that there have been 243 rate hikes by central banks globally. But one largest country and central defies this and it is Japan.

In a world that is fighting inflation from all ends possible, Japan is utilising a strategy that does not fight inflation at least in theory. The recent inflation data of Japan cane at the highest level since 1989. This has led to many companies increasing the prices of products that were the same price for the past two or three decades.

The government last week announced a package of $260 Bn that would in some calculation will bring inflation down by 1.2%. If history has taught us anything then it is that eventually, easy money leads to higher inflation, especially when the interest rate is negative and Japan has an interest rate of -0.1%.

Such policy action and trajectory has resulted in Yen depreciating by 7% despite a $50 Bn intervention by the central bank. This level of currency movement in a short period does not only impact the local economy but the global economy especially when the country is one of the largest exporting countries.

The problem with being one of the few with an easy monetary policy is that as time progresses and the intended results are seen any switch in policy from there on will become very painful. And such a scenario attracts heavy speculation, especially in bond and currency markets that have a real impact on financial stability.


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