Hayashi Links Weak Yen and Oil Costs to Japan's Inflation

Japan's Chief Cabinet Secretary, Yoshimasa Hayashi, stated on Monday that a depreciated Japanese yen, in combination with elevated oil prices resulting from the conflict in Ukraine, is the primary cause of the nation's cost-push inflation. As a prominent contender for the prime minister's position, his remarks offer insight into the potential economic policies of a future administration.

Inflationary Pressures from Currency and Energy

In his address, Yoshimasa Hayashi provided a clear diagnosis of Japan's current economic challenges. He attributed the rising prices faced by consumers and businesses directly to what economists call "cost-push inflation." This type of inflation occurs when the costs of production increase, forcing companies to raise prices.

According to Hayashi, two main factors are at play. The first is the persistent weakness of the Japanese yen. A weaker yen makes imported goods, particularly raw materials and energy, significantly more expensive. This directly impacts everything from manufacturing costs to the price of fuel at the pump.

The second factor he cited is the surge in global oil prices, a direct consequence of the ongoing war in Ukraine. As a nation heavily reliant on imported energy, Japan is particularly vulnerable to fluctuations in the global oil market. The combination of paying for expensive oil with a devalued currency creates a powerful inflationary effect.

Proposed Economic Relief Measures

Looking ahead, Hayashi outlined his potential policy response should he be chosen as the next prime minister. He committed to compiling a comprehensive economic package aimed at cushioning the financial blow of rising living costs for Japanese households.

This package would also allocate funds for disaster relief, an ongoing priority for the country. However, Hayashi emphasized a fiscally prudent approach to this new spending. He stated that the size of the economic package would need to be carefully considered in light of Japan's "quite small" output gap, which is the difference between an economy's actual and potential output.

"If chosen as premier, [I] will compile an economic package to cushion the blow from rising living costs, [and include] spending for disaster relief," Hayashi stated, signaling his policy priorities.

Crucially, he indicated a desire to avoid issuing new deficit-covering bonds to finance these measures. This suggests a focus on reallocating existing funds or finding other revenue sources, reflecting concerns about Japan's substantial national debt.

Monetary Policy and the Bank of Japan

Hayashi also touched upon the critical role of the Bank of Japan (BoJ). He expressed confidence that the central bank is conducting its monetary policy in a way that "does not deviate much from the government's thinking." This comment suggests a belief in continued coordination between the fiscal and monetary authorities.

For years, the BoJ maintained an ultra-loose monetary policy, including negative interest rates, to combat deflation. This policy divergence with other major central banks, like the U.S. Federal Reserve which was raising rates, was a major factor in the yen's depreciation.

The BoJ has recently begun to slowly move away from this stance, a process closely watched by global markets. Hayashi's comments imply that this gradual normalization is supported by the government.

Shifting Perspectives on Yen Strength

Perhaps one of Hayashi's most significant remarks concerned the nation's long-held view on its currency. For decades, a weaker yen was often seen as beneficial for Japan's export-reliant economy, as it made products like cars and electronics cheaper for foreign buyers.

When asked about the risk of a stronger yen—potentially triggered by interest rate cuts from the U.S. Federal Reserve—Hayashi noted that Japan's historical "aversion to a strong yen has diminished." This marks a potential shift in economic philosophy, acknowledging that in the current inflationary environment, the benefits of cheaper imports from a stronger yen may outweigh the drawbacks for exporters.

This evolving perspective reflects a new economic reality where managing import-driven inflation has become as critical as supporting export competitiveness.

Key Factors Driving the Japanese Yen

The value of the Japanese yen is influenced by several complex and interconnected factors. Understanding these drivers is essential for comprehending its recent movements and future outlook.

• Bank of Japan Policy: The BoJ's decisions on interest rates and other monetary tools are the most direct influence. The shift away from its ultra-loose policy has provided some support for the yen.
• Interest Rate Differentials: The gap between Japanese government bond yields and those of other countries, particularly U.S. Treasury bonds, is a powerful motivator for currency traders. A narrowing gap typically strengthens the yen.
• Global Risk Sentiment: The yen is traditionally considered a "safe-haven" currency. During times of global economic uncertainty or market turmoil, investors often buy the yen for its perceived stability, causing its value to rise.
• Economic Performance: The overall health of the Japanese economy, including GDP growth, trade balances, and inflation data, also plays a crucial role in determining the long-term value of its currency.

Following Hayashi's comments, the USD/JPY pair experienced a slight upward movement, trading 0.13% higher at 148.15, indicating a marginal weakening of the yen against the U.S. dollar in the immediate aftermath.