When you’re next thinking about the buying power of the Aussie dollar, spare a thought for Japanese households and consumers as they consider what a Yen can now buy.

Since January 2021, the Japanese Yen has lost ~30% of its buying power as measured in U.S. dollars (USD).

As I’ve mentioned before, the Bank of Japan’s (BOJ) continued use of yield curve control (YCC) has artificially held interest rates low and weakened the Yen.

But that’s not the only reason for its fall. There are at least four converging forces that have conspired to destroy the buying power of the Yen, and in turn Japanese households and consumers.

• First, Japan imports a shed load of fossil energy (~$130 billion of crude, coal, LPG, petrol, etc) as well as building materials and intermediate goods, etc., and the prices for these goods have increased significantly as a result of COVID/Ukraine supply chain/geo-political shocks.

• Second, as BOJ keeps interest rates artificially low through YCC, the Yen also weakens against the dollar and the country imports inflation as it trades and purchases items in USD. Think of this as an extra $40 billion plus just for its fossil fuel imports (and even more on the other USD denominated items within its overall $650 billion in annual imports).

• Third, while interest rates stay low, Japanese investors convert more Yen into USD and invest in the US, hence decreasing the value of the Yen and increasing the demand for (and price of) dollars.

• Fourth, as interest rates go up in other parts of the world and Japanese YCC remains, more Yen outflow occurs, i.e., more Yen is swapped for foreign currency, exacerbating the capital drain.

At a macro level, Japan is a net exporter (with cars, vehicle parts and integrated circuits being its largest exports) and that means at a sovereign level it receives more USD than it pays out.

But that does not help ma and pa consumers at the pump and the Tatami table.

And from their perspective, the USD wrecking ball is quite real.

If that makes sense, then think about the level of damage a strong USD is doing to much weaker emerging economies which are foreign fuel dependent net importers of just about everything. Japan might be inviting this as a result of its premediated YCC policy, but those smaller economies are not.

It’s not a great thought, and while limited supply seaborne fossil energy is priced in USD, it’s likely to continue.

Next time I’ll talk about how USD swap lines have been used to counteract the USD wrecking ball, but also how they might be used to weaponise the dollar in the event the White House decides to go a little feral.

Mike