Japanese Yen Crashes, U.S. Faces Recession

recession 1

The Japanese yen hit its weakest exchange rate against the U.S. dollar since 1990 on Thursday, dropping to 150 yen to the greenback.

The Nikkei 225 stock index was also down, losing nearly 1% during morning trading to 27,006.96 points. The Topix index shed 0.51% to 1,895.41.

A Yen previously slid in June, when it hit 132 against the dollar, the weakest level in 20 years.

Media reports said:

The Bank of Japan’s two-day meeting is slated for next week. Policymakers have ruled out a rate hike in order to defend against further weakening of the currency.

On Thursday, Japan’s 10-year government debt yields breached the 0.25% ceiling that the central bank vowed to defend – last standing at 0.252%. The yield on the 20-year bond also rose to its highest since September 2015.

The Bank of Japan also announced emergency bond-buying operations Thursday. It offered to buy 100 billion yen ($666.98 million) worth of Japanese government bonds with maturities of 10-20 years and another tranche worth 100 billion yen with maturities of 5-10 years.

The central bank has repeatedly vowed to buy an unlimited amount of bonds at a fixed rate in order to cap 10-year government debt yields at 0.25% as part of its stimulus measures for the economy.

On Thursday, Reuters reported Japanese Finance Minister Shunichi Suzuki said the government will take “appropriate steps against excess volatility.”

“Recent rapid and one-sided yen declines are undesirable. We absolutely cannot tolerate excessively volatile moves driven by speculative trading,” he said.

When asked how concerning is USD/JPY reaching levels around 150, ANZ chief economist Richard Yetsenga said he is “not that worried.”

“I don’t think we’re into destabilizing currency territory yet,” he said on CNBC’s “Squawk Box Asia.”

“There is a lot of an emotive word around it, but what problems have it engendered?” he said.

Shortly after the Bank of Japan’s latest decision to maintain low interest rates to support the country’s sluggish economy last month, officials confirmed they intervened to support the currency against further weakening.

That intervention briefly pushed the yen to 142 against the dollar. The spread between the highest and lowest points intraday was also at its widest since 2016.

In April 1990, the yen traded around 159.8 against the dollar and last breached 160 in December 1986.

Analysts say the depreciation of the Japanese currency stems from the central bank’s reluctance to tighten monetary policy at a time when the U.S. Federal Reserve, along with many other regulators, is hiking rates to tame soaring inflation.

Japan’s current baseline interest rate stands at 0%. The Bank of Japan on Wednesday ruled out a rate hike to prevent further weakening of the currency. Policymakers stressed the need to protect the economy from heightening overseas risks. A meeting of the Bank of Japan is scheduled for next week.

Record Surge In Corporate Bankruptcies in Japan

Citing a survey by Tokyo Shoko Research, Kyodo News reported on Sunday: The number of corporate bankruptcies in Japan saw a year-on-year increase of 6.9% to 3,141 over April-September, the first increase in three years.

The surge stems from the challenges Japanese businesses encountered in repaying government financial aid they had received in response to the pandemic, the credit research company said.

The analysts added that cases of insolvency have been on a steady rise since August due to high raw material prices triggered by a drop in the yen against the U.S. dollar and other major currencies.

In September alone, the number of bankruptcies in Japan was up 18.6% from a year earlier to 599, the survey showed.

The total liabilities left by bankrupt corporations soared threefold to 1.74 trillion yen ($11.70 billion) over the six-month period. A significant contributor to this figure was Marelli Holdings, a leading auto parts manufacturer, which filed for court bankruptcy protection in June under Japan’s civil rehabilitation law.

The transport sector recorded 162 bankruptcy cases, up 42.1% and the first increase in three years. The surge was attributable to soaring fuel prices. Meanwhile, the real estate sector posted 104 cases, down 5.4%, marking the lowest number in 30 years.

The service sector saw a total of 215 bankruptcies, the highest among the various industries and up for the eighth straight month, while the fastest growth in the number of cases was recorded in construction, which rose by 29.8% from a year earlier.

The regional breakdown shows that 29 prefectures, including Hokkaido and Kyoto, saw the number of bankruptcies increase, while 16, including Osaka and Hiroshima, recorded a decrease. Two prefectures, Shizuoka and Nagasaki, posted flat figures.

U.S. Economy Will Face Recession

Other media reports said:

The U.S. economy is 100% certain to enter a recession in the next 12 months, according to an economic model devised by two Bloomberg economists, and based on 13 unspecified financial indicators.

Spiraling inflation and aggressive rate hikes by the Federal Reserve will drive the US economy into a 1990-style recession in spring, Fitch Ratings warned on Tuesday.

The agency has downgraded its growth forecast for this year and for 2023, with the U.S. GDP now expected to grow by 0.5% next year, down from the 1.5% growth predicted in June.

According to Fitch, the economic slowdown will push the unemployment rate in the country from the current 3.5% to 5.2% in 2024 and entail a loss of millions of jobs. The report says that inflation remains the biggest problem for the U.S. economy with increased cost of living hitting cash-strapped consumers and undermining their confidence.

The agency has warned that inflation will “prove too much of a drain” on household income next year, shrinking consumer spending which will lead to a downturn during the second quarter of 2023.

Consumer prices surged more than expected in September with inflation running way above the Fed’s 2% target. This has reinforced expectations that the Fed will continue its aggressive inflation-fighting campaign and resort to another 75 basis points interest rate hike next month.

On Monday the agency reported that the apparently inevitable downturn might come even sooner than that – the model returned a 73% chance it would hit within 11 months and a 25% chance it would arrive within ten.

Those outcomes were significantly grimmer than the last time Bloomberg ran the model, when it predicted a recession within the year with just 65% certainty.

Not all experts are certain of the U.S.’s doom – a survey of 42 economists predicted a 60% likelihood of recession over the next 12 months. However, even their outlook had worsened since their last prediction, which gave the country a 50% chance of escaping the downturn.

Another poll of economists, conducted by the Wall Street Journal on Monday, found a 63% likelihood of recession in the U.S. within the year, pointing to the Fed’s interest rate hikes, which have come steep and fast after years with no activity. More than half of those surveyed suggested the central bank would keep increasing rates beyond what was healthy, eventually destabilizing the economy.

Inflation continues to hover near its four-decade high, even as the Fed has repeatedly hiked rates in an effort to rein in the soaring cost of living. While Biden has hyped job numbers in the hope of giving voters something positive to credit him for economically, insisting Washington’s finances are “strong as hell” and it is the rest of the world that has problems, his presidency has left a large hole in the country’s finances. Since entering the White House less than three years ago, Biden has added a whopping $3.37 trillion to the national debt, sending it to a record high of $31 trillion.

While many in the Republican Party – and even some Democrats – blame Biden for the U.S.’s financial misfortunes, his predecessor Donald Trump added over $7 trillion to the national debt as well, largely due to the unprecedented flood of money-printing that accompanied the Covid-19 pandemic.

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