Macroscope | How Japan’s Ukraine war stance could backfire on its currency and economy
- Japan is paying the price of its tough stance against Russia as it faces a weakening yen and rising tensions with Moscow over the disputed Northern Territories
- Add to this a yawning trade deficit and reluctance to tighten monetary policy, and Japan could see the yen lose value even further
The Japanese yen plunged to a 20-year low of 129 to the US dollar last week, amid a widening gap in interest rates between Japan and the United States. Japan is the only Group of Seven country to stick to a loose monetary policy in the face of high global inflation.
The Bank of Japan holds almost half of all Japanese government bonds, almost 80 per cent of exchange traded funds, and 7 per cent of Japanese listed stocks. It also keeps interest rates near zero to maintain a flat yield curve on 10-year bonds. Tightening monetary policy would therefore negatively affect both government bonds and the stock market at once, potentially throwing Japan’s economy into turmoil.
For 30 years, the yen has triumphed as a safe haven currency because of Japan’s consistently neutral position and net foreign assets of US$2.7 trillion, the world’s largest.
Although Japan has relied on the US for 100 per cent of its security since 1951, it has been free to establish and maintain peaceful relationships with all countries, including US rivals like Iran, China and Russia.
The imperative for lasting world peace is enshrined in Japan’s constitution; Japanese schools have conducted peace education since the end of World War II. No foreign country or terrorist organisation has attacked Japan on home soil since it regained its sovereignty in 1952.
