Japan's currency hit its weakest level in nearly 40 years

**Sarah Rogers** (0:01)
As Japan's Yen drops to a 40-year low, one business tells us it's struggling to hang on. It's World Business Express from the BBC World Service. I'm Sarah Rogers. Also our interest rate rises on the way. We ask a leader at the European Central Bank Forum and a new deal for Steele. The EU is about to introduce tighter rules.
The Japanese government says it's ready to step in after the yen dropped to its lowest level against the dollar in almost four decades. It means imports like gas and oil become more expensive, which can drive up the rate at which prices rise and so people spend less. Rob Aplin owns Benchmark, a small construction company in Tokyo.

**Rob Aplin** (0:49)
When our materials are imported basically, that really affects the price of materials. It's really difficult, but I'm locked in on a lot of contracts at the moment that I set prices like six months ago. I can't change that at the moment. We're stuck between a rock and a hard place, I'd say.

**Sarah Rogers** (1:05)
How much are you losing then?

**Rob Aplin** (1:07)
I'd say 10, 15 percent is very, very difficult.

**Sarah Rogers** (1:11)
How long can you go on like that for?

**Rob Aplin** (1:13)
Not for much longer. I mean, yes, some jobs I'm going to make a loss on at the moment. The economy here is so stagnant.
I mean, another problem we got at the moment is because of the Iran war, there's lots of issues with materials that we can't get at the moment, like certain type of foam insulation for flooring. Anything that's oil-based, paint-wise is the real issue at the moment. How long can we go on for? If things get really bad, obviously, yeah, 18 months or so, we can carry on like this maybe.

**Sarah Rogers** (1:42)
Well, the yen passed 162 to the dollar for the first time since 1986 during this morning's trading. That despite Japan pumping 73 billion dollars in foreign reserves between April and May.
Nabuko Kobayashi is an independent management consultant based in Tokyo. She explained what's driving it.

**Nabuko Kobayashi** (2:01)
This is primarily driven by the policy rate gap that we have between Japan and other advanced economies. For instance, the Fed Reserve FRB is at 3.5, ECB 2.25, and BOJ, even though it had a rate hike in June, it's only still at 1 percent. So given this lower rate, relatively speaking, in Japan, that would drive depreciation of the currency.

**Sarah Rogers** (2:32)
I mean, the Japanese government said it's prepared to intervene. What will that look like? Will it make any difference or will it just be a temporary fix?

**Nabuko Kobayashi** (2:40)
I think the consensus is that it will be only temporary at best. Intervention in the currency is never a long-term fix.
We don't really see the market rattled by it. Of course, the depreciation of Yen is advantageous to the earnings of the exporters here. So it's not single-handedly bad for business in Japan.

**Sarah Rogers** (3:04)
But for Japanese households, I suppose, what does a weaker Yen mean in practical terms? Are they already feeling the impact?

**Nabuko Kobayashi** (3:11)
They sure are. For consumers, it's actually quite more bad news because so much of the consumer price is driven by the input price of the import. Starting with energy, but food as well.

**Sarah Rogers** (3:24)
So what can finance ministers do?

**Nabuko Kobayashi** (3:28)
So I think if the government is supportive of the rate hikes, it will probably be poised to do so in the remainder of the year. That would lessen the gap that it has with other rates in the world.

**Sarah Rogers** (3:40)
Nobuko Kobayashi in Tokyo. And the door's also been left open for more interest rate rises in the euro zone. Earlier this month, the European Central Bank raised rates for the first time since 2023 And right now, the ECB is hosting its annual conference in Portugal.
I asked governor of the Central Bank of Latvia, Martins Kazaks, if more hikes were on the way.

**Martins Kazaks** (4:01)
Given that the shock was smaller, given that perhaps it is close to its end already, with some of the supply routes reopening and Strait of Hormuz starting to kind of pass through more of the ships, we might not see inflation rising high enough to lead to strong nonlinearities, repricing by corporates, more push from the household part to raise wages. And that might make this inflationary episode more timid.

**Sarah Rogers** (4:32)
So why raise rates at all then? UK didn't raise interest rates, neither did the US. Why did the ECB?

**Martins Kazaks** (4:39)
Well, the shock is not small enough to look through. And those three, four months of the conflict did put in motion some of the inflationary effects. And that requires action, because if one allows inflation to root in, if one allows strong second round effects, especially in the labor market to start to develop, then we would simply need to become more aggressive. The move that we did in June by hiking the rates by 25 basis points was a very appropriate one.