The Japanese yen (JPY) is becoming the next Turkish lira (TRY)

The Japanese yen (JPY) has been in a remarkable downtrend against the US dollar, leaving some analysts to compare it with the Turkish lira. The USD/JPY exchange rate has surged to 152, the highest point in more than three decades. 

It has been in a relentless rally for years. For example, it has jumped by over 48% from its lowest point in 2021 and by over 100% from its 2012 lows. The performance means that most people in Japan have seen their purchasing power crash hard in the past decade.

The Turkish lira’s performance has been much worse. While the Japanese yen now sits at the lowest level in over 30 years, lira has plunged to the lowest level on record. It has slipped by more than 1,786% from its 2012 lows.

Still, there are similarities between the two currency collapses. For one, they have been engineered by their respective central banks. In Turkey, the CBRT made headlines when it slashed interest rates in a period of high inflation.

As a result, most consumers and companies have lost faith in the local currency and moved to foreign ones like the US dollar. This explains why the USD/TRY pair has surged even as the CBRT delivered several interest rate hikes.

The Japanese yen, on the other hand, is the only central bank still holding negative interest rates. It has maintained rates in the negative zone since 2016. At the same time, it has boosted its balance sheet through its quantitative easing (QE) policies. 

The most recent data by the Fed shows that the Bank of Japan has over $7.5 trillion in assets. This is a big number since Japan’s GDP stands at about $4.9 trillion while the Federal Reserve has over $7.86 trillion.

It is unclear whether the BoJ has the solution to boost the Japanese yen. In its most interest rate decision, the bank tweaked its yield curve control and hinted that it will abandon its negative rates in 2024.

It is still unclear whether the Japanese yen will bounce back if the BoJ decides to hike rates. For one, as I wrote last week, the current Japanese government announced a new round of stimulus, which will lead to more yen weakness.

Unlike Turkey, however, Japan holds vast foreign reserves, which it can deploy to boost the local currency. It holds over $1.23 trillion in foreign reserves, mostly in US dollars. Turkey, on the other hand, holds about $115.6 trillion in reserves.