Chart Of The Day: Yen Trapped In Vicious Inflation Cycle

 | Oct 13, 2021 15:32

As one of the world's top energy importers, Japan finds itself in a vicious cycle. As energy prices rally, more yen are required to pay for energy imports. Then, as the Japanese currency devalues, even more of it is required to pay for the same amount of energy imports. 

The Japanese economy has been battling deflation for over two decades. Deflation is when the costs of goods and services in an economy are falling. While that may appear positive to consumers, it is in reality financially inviable. Falling prices means corporates reduce activities as they don't want to produce goods at low margins. This translates into falling employment and wages. 

However, after battling deflation, Japan is now under the gun of inflation. While a tempered rise in prices could benefit the economy—as businesses increased profitability encourages expansion, leading to job creation and rising wages—prices rising too fast would chip away at the yen’s buying power, which would lower consumer and investment spending.

Japan’s wholesale inflation soared to the highest in 13 years, which puts a strain on manufacturers, already suffering from supply shortages, exacerbating the challenges of low domestic consumption.

Let’s see how this translates into the supply and demand as seen on the charts.