Japan is the third largest
economy in the world after the United States and China. It has a population of
almost 130 million people and a GDP of more than $4.8 trillion. The country is
famed for its industrial base and its large companies that dominate the world.
These include Nissan, Toyota, and Mitsubishi. Japan is also known for the work
ethic of its people, who are known to be very hard working. These people work
for more than 80 hours every week. The country is also known for its aging
population and its declining population.
This year, the Japanese yen has
been losing ground against the USD. The reason for this is that investors have
almost given up on the Bank of Japan’s ability to hike interest rates because
of the slowing inflation rate. Today, the numbers showed that CPI in December
rose by 0.7%, which was lower than the expected 0.8%. This is much below the 2%
target the Bank of Japan has put.
The low inflation rate has defied
the economic principle of the Philips Curve. This principle states that a
country’s inflation rate tends to rise as the employment numbers become better.
This is because the purchasing power of the people improves when they are
employed. In Japan, while the economy is doing well and the unemployment is
low, inflation has not been stirred.
There are a few reasons for this.
First, Japanese are not known for their extravagance. Instead, they are known
to be excellent savers. Second, with most Japanese citizens working so hard,
they have no time to shop. For this reason, the government has introduced more
holidays to help spur consumer spending. Finally, most Japanese are known to
remain at an employer for years. Therefore, tightening labor market does not
always lead to better pay.
As shown below, the USD/JPY pair
has been rising this year, gaining by more than 1%. The pair has reached a YTD
high of 109.4. With weaker data from Japan, there is a likelihood that the pair
may continue moving higher.