The Japanese yen has been in the spotlight this week as concerns about its future continues. The USD/JPY pair initially surged to a high of 160.17 on Monday and then quickly retreated to 152.93 as the Bank of Japan (BoJ) pumped over $33 billion to curb the crash.

The Japanese yen has been the worst-performing currency in the developed world as it has crashed by over 53% from its highest point in March 2020. Going back, the currency has plunged by more than 105% since November 2011.

In the same lens, the Turkish lira has become almost worthless as it became one of the worst-performing currencies in the emerging markets. It has crashed by over 2,200% from its highest level in 2011.

As such, there are concerns about whether the Japanese yen will continue crashing like the Turkish lira. 

To understand this, we need to explain why the Japanese yen has crashed hard in the past few years. First, Japan is one of the biggest importers in the world since it does not have many natural resources. 

Its sogo shoshas, like Marubeni, Mitsubishi, and Itochu have benefited from this trend by sourcing natural resources and shipping them to Japan. As a result, the falling Japanese yen has stirred inflation in the country.

The most recent data showed that the headline inflation rose to over 2% in March. While this is a low figure compared to other countries, it is a significant number for a country that has not been used to price changes.

Japan is also seeing wages rise for the first time in years. In March, the country’s largest union agreed to the biggest wage growth in 33 years.

USD/JPY vs USD/TRY

In other countries, higher inflation is usually met with higher interest rates. In the US and other European countries, interest rates have jumped to its highest level in more than two decades.

The Bank of Japan, on the other hand, has been reluctant to hike interest rates. In fact, it made big headlines when it delivered a 10 basis hike in March as it exited negative rates scenario.

The BoJ is afraid of hiking rates since that will push the country’s debt repayment costs sharply higher. That’s because Japan is one of the most indebted countries in the world with a total public debt of over $9.2 trillion. That is a big figure considering that its economy has a GDP of $4.2 trillion and is not growing. The BoJ itself holds over $8 trillion in assets. 

As such, a small increase in rates will lead to more debt repayments and budget deficits. Fitch estimates that Japan’s deficit widened to 4.9% of GDP in 2023.

Therefore, Japan will find it difficult to move from the current hole considering that it is also going through severe demographic changes as its population falls.

The implication of all this is that the Japanese yen will continue falling against the US dollar. As I warned before, any interventions will be short-term, as we saw in 2022. Besides, there are signs that the Federal Reserve will not cut interest rates this year.

Therefore, amid these challenges, there are questions about whether the Japanese yen will become the next Turkish lira. As shown in the chart above, the two currencies have been in a severe downtrend for a long time.

Like the JPY, the Turkish lira has collapsed because of the actions of the Central Bank of the Republic of Turkey (CBRT), which has embrace unorthodox monetary policy. For a long time, the bank was always inclined to cut interest rates even when inflation jumped.

The implication of all this is that most people and businesses lost confidence in the Turkish lira. As a result, they have avoided buying the currency even after the CBRT hiked rates to 50%.

It is still too early to predict whether the sell-off of the Japanese yen collapse will continue in the long term. I am inclined to think that it will. The only hope for Japan is that it holds vast forex reserves. Japan holds about $1.15 trillion of US debt, which it can deploy to salvage the yen. 

The other short-term hope for the BoJ is a sharp decline in inflation, which will lead to Fed rate cuts. Such a move will narrow the carry trade gap between the USD and the JPY.

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