The yen is falling, but this does not mean that it has become much cheaper

For sustainable strengthening of the national currency, it will be necessary to change the structure of trade flows in Japan.

The Japanese yen has been an unexpected victim of rising interest rates around the world. The currency has fallen about 15% against the dollar this year, with the yen hitting lows against a broader basket of currencies last seen in the 1970s.

Currency traders in Tokyo believe that the fall in the yen is caused by a divergence in monetary policy: high yields in the US and low yields in Japan. While the US Federal Reserve appears to have embarked on the fastest monetary tightening since the 1990s, the Bank of Japan is sticking to its plans for sustained easing.

Bank Chairman Haruhiko Kuroda’s arguments are as simple as they are unshakable. Low inflation in Japan does not warrant a hike in domestic interest rates on a scale close to the Fed’s, at least not yet. With yields curbed by the central bank, which already owns half of the government bond market, the yen has emerged as a major safety valve in the face of a widening gap between US and Japanese interest rates.

As the currency weakens, contrary recommendations to buy the yen are getting louder. What could be better than a cheap safe-haven currency to protect against an uncertain global outlook? This is exactly what the debate is about. Of course, the yen weakened. But is it that cheap?

Counter factors
Investors should be wary of arguments that suggest the yen is grossly undervalued. They do not take into account structural changes in the Japanese economy, which radically changed the terms of trade with the yen. Undoubtedly, the most important of these is the long-term shift in Japan’s balance of imports and exports.

In May, the country posted its second-largest monthly trade deficit on record, due in part to a surge in energy and commodity imports. However, the economy’s long-term transition from a trade surplus to a deficit reflects larger forces at work. The deployment of factories by Japanese companies abroad undermined exports for a decade