Travelers to Japan must be smiling broadly when reading this news. Lately, the ringgit has been strong when converted to Japanese Yen. If last year they needed around RM30 to convert to 1,000 Yen, now even RM25 is enough!
This situation raises a question, what exactly has happened to the Yen?
The answer is simple but very technical. The Japanese Yen is weakening significantly, and this fall is happening even though the Bank of Japan (BOJ) has raised interest rates to their highest level in almost three decades.
Yen Weakens Despite Rising Interest Rates
In theory, when a central bank raises interest rates, the country's currency should strengthen. However, the case of Japan is different. Although the BOJ has started raising interest rates after years of keeping them near zero, Japan's interest rate level is still much lower than other countries.
Although Japan has raised interest rates to around zero, they are still much lower than those in the United States (around 5.25–5.50%), the United Kingdom (3.75%) and Malaysia (3.00%), causing the Yen to remain under pressure.
As a result, global investors do not see the Yen as an attractive currency to hold.
The Role of Interest Rate Differentials
In global financial markets, money is always “moving” to places that offer better returns. When interest rates in Japan are lower than in other countries, investors tend to sell Yen and exchange for currencies that offer higher returns, including the US dollar and Asian currencies.
This phenomenon is known as the interest rate differential effect and causes demand for Yen to decrease, thereby depressing the value of Yen against other currencies.
In other words, it is not the Ringgit that suddenly became too strong, but the Yen that lost value faster.
Why Was the BOJ Rate Hike Not Strong Enough?
Although the BOJ rate hike was the highest in almost 30 years, it is still considered very cautious. Japan is constrained by several constraints such as high government debt and an interest-rate sensitive domestic economy.
As a result, the BOJ cannot raise rates as aggressively as other central banks. The market sees this move as symbolic, not a major change that can support the Yen in the short term.
What Does It Mean for Malaysians?
For Malaysians, the weak Yen has positive effects such as cheaper travel expenses to Japan and more affordable Japanese goods and products.
Will the price of a refurbished car or a limited Arai helmet from Japan be cheaper because of this?
However, for Japan itself, a weak Yen increases import costs and inflationary pressures, putting the BOJ in a prolonged policy dilemma.
This phenomenon reflects the structural weakness of the Japanese Yen, which is still overshadowed by global interest rate differentials even though the BOJ has started raising rates for the first time in almost three decades.
As long as Japanese interest rates remain low relative to other countries, the Yen is expected to remain under pressure, and this “cheap Yen” situation may last longer than many expect.
