Why the Yen is Depreciating: An Economic Analysis

In 2023, a record number of Singaporeans visited Japan, and it’s likely no coincidence that this surge coincided with the yen hitting a record low. For travelers from Singapore and elsewhere, a weaker yen has made Japan a more affordable and attractive destination. This trend highlights not just changing travel patterns but also significant shifts in global financial currents.

At the heart of these shifts are "hot money" flows, a financial phenomenon where money rapidly moves between financial markets and countries to take advantage of high returns offered by interest rates or market opportunities. Hot money is typically liquid and moves quickly away from markets with lower interest rates to those with higher rates, seeking the best possible return on investment in a short period.

In the last two years, we've seen major movements in interest rates globally. The Federal Reserve and several central banks worldwide have sharply increased interest rates to combat inflation and stabilize their economies. This policy shift has led to significant inflows of hot money into these countries, enhancing the demand for their currencies, including the U.S. dollar.

Contrary to this global trend, the Bank of Japan has maintained its interest rates near zero. This strategy aims to stimulate domestic economic growth by making borrowing cheaper and encouraging spending and investment. However, the side effect has been a significant outflow of hot money from Japan. Investors and institutions sell yen to purchase higher-yielding currencies, increasing the supply of yen on the global market and thus depreciating its value.

Singapore, which often aligns its monetary policy closely with global trends due to its open economy, has seen its interest rates increase as it is an interest rate taker. This increase in interest rates has strengthened the Singapore dollar against the yen, making travel to Japan even more economically viable for Singaporeans.

The yen's depreciation, driven significantly by Japan's decision to keep interest rates low in contrast to the rising rates in places like the U.S. and Singapore, vividly illustrates the impact of global financial policies on currency values. This situation has offered Singaporeans more budget-friendly travel options to Japan, highlighting how deeply interconnected the world's economic systems are. Monetary policy decisions, while made at a national level, can have extensive global repercussions, affecting everything from currency strength to international travel affordability.