The Silent Run on the Yen
BOULDER – Nearly three decades ago, as a visiting professor at Konan University in Kobe, Japan, I learned to live in a cash society. Rather than open a checking account – and maintain the required minimum balance of $1,000 – I did what Japanese did: carry large amounts of yen and pay for everything in cash. At the time, Japanese were very frugal, and low interest rates compelled many to hold their savings in cash in safe-deposit boxes. Recently, however, Japanese spending habits have changed significantly.
The Japanese are adjusting to a depreciating currency, with the value of the yen having fallen 16% over the last year, to ¥100 to the dollar. This trend is set to continue, given that the Bank of Japan (BOJ) has unleashed the world’s most aggressive quantitative easing (QE) program, which entails pumping ¥7 trillion ($73 billion) into the economy monthly.
The BOJ hopes that the measures will lower interest rates and kick-start Japan’s long-stagnant economy. But, rather than helping the BOJ to reach its 2% inflation target in two years, QE is causing interest rates on government bonds to increase sharply, thereby pushing up commercial lending rates for individuals and corporations. As a result, Japan’s commercial banks, hypersensitive to the risk and uncertainty associated with interest-rate fluctuations, have not responded to QE by increasing their lending activity.