In the foreign exchange market in 2023, the “excessively cheap yen” is attracting attention. The yen fell the most among major currencies, hitting a record low relative to theoretical values based on prices at home and abroad. On the other hand, there are many voices predicting yen appreciation in 2024. But if the economy does not strengthen, the correction may not be as good as expected.
At the end of 2022, the yen exchange rate was around 131 yen per dollar, and by November 2023, it had depreciated to the range of 151.5 to 151.9 yen, and the yen had depreciated by 20 yen against the dollar.
It has now recovered to the 140 yen level and is down 8 per cent for the year to December 27, the biggest drop among major currencies. The depreciation of the yen has also reached historic levels.
According to the International Monetary Institute, as of the latest November purchasing power parity was ¥90 based on the corporate price index and ¥108 based on the consumer price index. The difference from the actual exchange rate in November was as high as 59 yen and 41 yen respectively. As a deviation in the direction of the depreciation of the yen, both reached the highest since 1973.
In fact, the yen has depreciated beyond purchasing power parity in consumer prices since the 1980s. At that time, the Federal Reserve Board (FRB) led by Volcker implemented an aggressive monetary tightening policy to eliminate inflation. Us short-term interest rates rose rapidly, at one point reaching about 20 per cent.
The yen’s depreciation in 2023 is partly the result of structural weakness in the Japanese economy. Japan needs to reform its rigid labor market, among other things, so that businesses and individuals can have expectations for domestic economic growth.
Otherwise, it is also possible that the yen appreciation in 2024 is only within the range of the dollar appreciation correction, around 130 yen.