Behind a seemingly disorderly devaluation of the currency, is the careful layout of the Japanese authorities hidden?

Compared to the “free fall” of the yen before, the Japanese authorities' actions have slowed down more than just half a beat; judging from the depreciation of the yen as a pawn to revive the economy, this behavior seems easier to explain.

In its May 3 report, HSBC stated:

The weak yen is not only an exchange rate adjustment, but also plays an important role in “reviving the inflationary economy” structurally. After losing competitiveness for many years, exporters finally felt the boost brought by exchange rate adjustments, and Japan may need a long period of weak exchange rates to transform the boost into a lasting revival of the manufacturing industry.

The exchange rate of the yen against the US dollar once fell below 160. In fact, for a long time, the exchange rate of the yen against the US dollar continued to decline and has returned to its lowest point in decades. The actual effective exchange rate “declined sharply” in the mid-1990s, and is currently at its lowest level since the early 1970s.

This ushered in a turning point for the Japanese economy, which had been mired in deflation and loss of competitiveness for a long time. HSBC said:

In fact, the depreciation of the yen has begun to inject dynamism into the Japanese economy. The recent significant increase in the contribution of net exports to GDP growth has strongly supported economic recovery.

However, even as exports have increased, Japan's share of global manufacturing value added has continued to decline, and has shrunk by two-thirds since the late 1990s. This means that the yen may need to depreciate further to drive a lasting recovery in manufacturing and exports.

In addition to the manufacturing industry, the weak yen also brought dividends to the travel service industry. HSBC said:

Although the cherry blossoms in Tokyo bloomed later this year and didn't open until April, the number of visitors reached a record high in March. The boom in inbound tourism has supported related employment and wage levels from restaurants to hotels and retail stores, thereby tightening the job market and helping to boost wages.

Furthermore, the weak yen not only supports the economy by attracting overseas tourists; it also restricts Japanese people from traveling abroad. They prefer to stay in cheaper parts of the country, so Japan now enjoys a healthy surplus in travel services.

Taken together, HSBC points out that the depreciation of the yen has largely contributed to the “re-inflation” process that the Japanese government and central bank have been looking forward to for a long time. Although rapid devaluation may bring the risk of import inflation, import price inflation has not risen yet, and the government has mitigated the impact on households through fiscal measures.

As long as the depreciation process is orderly and manageable, and short-term inflationary pressure is within a manageable range, the Bank of Japan has yet to see any momentum to drastically tighten its policy. After all, ending long-term deflation is its fundamental goal, and the depreciation of the yen is a “good medicine.”

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