The Bank of Japan (BoJ) has decided to increase interest rates to around 0.25% against the 0-0.1% range. Moreover, the central bank also intends to scale back its Quantitative Easing (QE) program by reducing its bond purchases to about JPY 3.0tn per month against the original JPY 6.0tn per month. The decision comes after a decade-long stimulus program to tackle Japan’s slowing economy and deflationary trend. The BoJ had hinted at potential monetary tightening given the Yen’s recent weakness and rising inflation.
The Japanese Yen recovers: Since January 2021, the Japanese yen lost about 35% of its value against the US dollar, touching a high of 161/USD in July 2024. The weakness stemmed from Japan’s rising interest rate differentials with other countries. As central banks hiked rates to tackle the rampant inflation in the post-Russia/Ukraine conflict era, the BoJ kept rates in the 0-0.1% range. Notably, the US Fed Fund rate was increased to 5.25-5.50%.
Over the past three weeks, the Japanese Yen began to recover as anticipation grew of a possible intervention by the BoJ. The Yen has recovered 8% of its value, as the JPY/USD parity fell below the 150 mark.
Potential Impact on Pakistan’s Trade with Japan:
Japan is the global leader in exporting Vehicles, Machinery, and Electrical Equipment. Pakistan’s import bill from Japan stood at around USD 922mn during 11MFY24, constituting mainly vehicles (USD 292mn), Steel Products (USD 204mn), and Machinery (USD 62mn). The import figure was significantly higher at USD 2.0bn in FY22.
Pakistan’s automobile industry has historically benefitted from a weaker Yen, shoring its margins (see graph on the right) as import costs from Japan eased. The reverse is true as margins come under pressure when the JPY strengthens against the Pak Rupee. Given JPY’s recent rally, automobile assemblers dealing with the Japanese market (INDU, HCAR, Pak Suzuki) may constrict their margins further. Non-Japanese brands, however, may benefit from this development. Besides favourable currency dynamics, these brands may benefit from the higher costs of imported used Japanese cars.