Analysis of Yen Depreciation: Taking a look in terms of industry-specific effective exchange rates and AMU deviation indicators

1．Introduction

As a result of an interest rate hike implemented by the Federal Reserve Board (FRB) in March 2022, amid the yen’s downtrend which began in 2020, the interest rate differential between Japan and the United States widened, resulting in the yen’s further depreciation. As well as the interest rate differential, the difference in the monetary policy direction between Japan and the United States has been pointed out as a factor behind the yen’s depreciation. First, this article analyzes how much of the yen’s depreciation is accounted for by the change in the Japan-U.S. interest rate differential. Next, it examines the yen’s depreciation under the lens of various indicators. A RIETI research project called “Exchange Rates and International Currency” calculated and published industry-specific real effective exchange rates regarding 25 countries, including Japan. At the same time, it calculated and published the value of the Asian Monetary Unit (AMU), which represents the weighted average of the values of a basket of East Asian currencies, and the AMU Deviation Indicators, which show the degrees of overvaluation or undervaluation of those currencies. Based on the indicators, the article examines the yen’s depreciation from an industry-by-industry perspective and also looks at the yen’s value relative to other East Asian currencies.

2． Recent Yen Depreciation and Japan-U.S. Interest Rate Differential

Figure 1 shows the trends in the yen’s nominal and real effective exchange rates, which represent the Japanese currency’s value relative to foreign currencies in general. Unlike the nominal effective exchange rate, the real effective exchange rate takes into consideration the inflation rate trends in Japan and other countries, and as a result, there is divergence between the trends in the two effective exchange rates. If the inflation rate in Japan is lower than the rates in other countries, the yen’s value as measured by the real effective exchange rate is lower than the value as measured by the nominal effective exchange rate, with the margin of difference corresponding to the difference in the inflation rate. In addition to the change in the nominal effective exchange rate, the relatively low level of the inflation rate in Japan compared with the rates in other countries is also a factor behind the downtrend in the yen’s real effective exchange rate. It has been pointed out that the yen’s depreciation against the dollar since March 2022 is attributable to the widening of the difference in the monetary policy between Japan, where the Bank of Japan has maintained its monetary easing policy, and the United States, where the FRB has launched a round of interest rate-raising with a rate hike on March 16 (followed by hikes on May 5 and June 16).

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Industry-Specific Nominal and Real Effective Exchange Rates of 25 Countries Worldwide
https://www.rieti.go.jp/users/eeri/en/

AMU and AMU Deviation Indicators
https://www.rieti.go.jp/users/amu/en/index.html

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