Kevin Buckland

TOKYO, Reuters – Japan’s real effective rates have fallen to their lowest levels in fifty years. Analysts at J.P. Morgan believe that the currency will fall further to reduce Japanese consumer spending and increase the possibility of capital flight.

Last year, the yen was the weakest G10 currency. Its underperformance continues into 2022. The nominal exchange rate for the dollar fell to 116.3550 this week, a record low five years ago. This is in addition to its near-two month lows against the sterling and euro.

According to J.P. Morgan calculations, the yen’s effective real rate (referenced to consumer inflation) fell to 66.3 on Tuesday. This is down from a base 100 in 2010. It was likely to be its lowest level since June 1972. This rate is the average weighted domestic price relative to Japan’s trading partners.

Tohru Saki, Benjamin Shatil, and Sosuke Nagamura observed a strong correlation between the U.S. interest rates long term and the yen. On Thursday, the yen was at its highest level in nine months at 1.7192%. J.P. Morgan expects that it will reach 2% before June’s end. The current correlation is expected to continue, meaning that the yen might drop below 119/dollar.

Companies ranging from condiment manufacturers to stationery producers had announced recent price rises. “The risk of an unexpectedly high Japanese inflation rate cannot be discounted,” they stated.

Given that Japanese salaries have fallen relative to those of other countries, it is possible that Japanese families will be tempted to make investments offshore. This could prove to be a good idea, as they believe that imports may become more expensive than in the future.