The Fed's interest rate hike policy is destroying the yen. The yen exchange rate is rapidly depreciating, and human intervention is already on the string!
The yen has historically been known as a safe-haven currency, but now the yen is far better than the market imagines! On April 20, the yen fell to the 129 yen mark against the dollar, the lowest since May 2002. Not only against the US dollar, but also against other non-US currencies recently, it has also weakened. Among them, the onshore yuan against the yen has also broken through the 20 mark on the same day. The sharp depreciation of the yen has made it the worst-performing major currency in the world this year after the ruble.
On April 19, the dollar index, which measures the greenback against six currencies, broke through 101 at one point and rose to 101.02. It is up 2.6% so far this month. Relative to the strength of the dollar, if you look at it in the long run, the yen has depreciated sharply against the dollar by about 30% since the beginning of 2021.
After the ruble, the Japanese yen is the worst-performing major currency in the world
In recent days, the sharp depreciation of the yen has become the focus of attention in the international market. In particular, after the outbreak of the Russian-Ukrainian conflict, the rate of depreciation of the yen exchange rate has accelerated significantly, from 115 in early March, in less than two months, it quickly exceeded 129, and in more than a month, it depreciated by more than 14 yen. It is worth noting that the yen became the worst-performing currency in developed countries this year, falling by about 10% against major currencies, becoming the worst-performing major currency in the world after the ruble this year.
In this regard, Japanese Prime Minister Kishida Fumio believed on April 15 that the Bank of Japan's monetary policy should aim to maintain Japan's inflation rate at 2%, not to manipulate the yen pair. Kishida said that the recent inflation problem in Japan is due to the rise in international oil prices and the price of a number of raw materials, and has nothing to do with the weak yen.
As soon as this statement came out, the market realized that the Japanese government or the central bank would not change monetary policy to support the yen. Conversely, the Japanese government or central bank is more likely to take advantage of this global surge of inflation to solve Japan's long-term deflation problem.
On April 18, Bank of Japan Governor Higashihiko Kuroda, who has been fighting deflation for more than 20 years, said the yen's recent trend was "quite drastic" and could hurt the company's business plans. This is the Bank of Japan's helmsman's strongest warning to date about the drawbacks of currency depreciation.
In response to questions from members of the Japanese parliament on the morning of April 18, Kuroda said that the yen had depreciated by about 10 yen against the dollar in about a month, a sharp decline that could make it difficult for companies to make business plans. Kuroda's statement shows that the Bank of Japan's current attitude towards the depreciation of the yen is gradually moving from "increasing concerns" to "rising concerns".
On April 19, Japanese Finance Minister Shunichi Suzuki said in parliament that the current depreciation of the yen would do more damage to the economy than it would bring, which was the clearest warning of the recent plunge in the yen against the dollar.
"Stability is important, and sharp currency fluctuations are not advisable." Suzuki said, "The weak yen has its advantages, but in the current situation where global crude oil and raw material costs are soaring, the disadvantage is even greater." The weak yen has pushed up import prices, hurting consumers and businesses who are unable to pass on costs. "This is also the clearest signal from the Japanese authorities that they are uneasy about the continued decline of the yen." However, when it comes to how the BoJ should respond, including whether intervening in the market is an option, Shunichi Suzuki declined to comment.
Stuck in stagnation, how far is the Central Bank from intervening in the currency market?
At the moment, the yen is moving towards 130 against the dollar. Many investors are betting that the yen will fall further. The CFTC's latest data for the week ended April 12 showed that net short positions in the yen were the largest in the last three and a half years.
Overseas investors believe that the interest rate differential between Japan and the United States will widen, and they have sold the yen to buy dollars. Currently, the US 10-year yield is holding near a 3-year high of 2.884%, while the Bank of Japan has been intervening to keep the Yield on the 10-year Bond at around 0% and no higher than 0.25%.
As the Fed accelerates interest rate hikes to curb recent inflation in the United States, and the Bank of Japan does not change its posture of continuing large-scale monetary easing, the directional differences in Japanese and U.S. monetary policies have become more pronounced. In this case, the market expects that the depreciation of the yen will be difficult to change.
Under the depreciating currency, Japanese companies are suffering for days. According to a Reuters survey of about 500 large and medium-sized Japanese non-financial companies in early April, more than three-quarters of Japanese companies said the yen had depreciated to the point of disadvantage to their businesses, and almost half expected earnings to be impacted.
How far is the Bank of Japan from intervening in the currency market? Will the fall of the yen below 130 against the dollar trigger intervention to enter the market? Become the focus of market attention. Japanese Finance Minister Shunichi Suzuki, who left for the United States this week, said he would "communicate closely" with the United States on currency issues and that he planned to meet with U.S. Treasury Secretary Janet Yellen in Washington.
If the government intervenes, how the specific operations will be carried out is also a matter of concern to the market. Analysts said that in addition to verbal intervention, Japan has a variety of options to prevent the yen from falling excessively, including direct intervention in the currency market, selling dollars and buying yen. Some market investors say intervention will only be an option if Japan faces a "triple" sell-off of yen, domestic stocks and bonds, similar to the sharp capital outflows experienced by some emerging economies.
In order to intervene in selling dollars and buying yen, Japan must use the dollars of its foreign exchange reserves. Currently, Japan's foreign exchange reserves are $1.356 trillion, the second largest foreign exchange reserve after China, and may be mainly composed of dollars. If monetary intervention is to be made against USD/JPY, the informal consent of G7 countries, especially the United States, is also required. The United States has historically opposed the idea of currency intervention, except in the case of extreme market volatility.
The Bank of Japan will meet on April 28, which has also been interpreted as a potential opportunity for Japan to adjust interest rates and intervene in exchange rates.
The dollar index broke 101 for the first time in two years
On April 19, the dollar index, which measures the greenback against six currencies, broke through 101 at one point and rose to 101.02. It is up 2.6% so far this month.
Relative to the strength of the dollar, if you look at it in the long run, the yen has depreciated sharply against the dollar by about 30% since the beginning of 2021, while the euro has also depreciated by 13% against the dollar.
In fact, it is not only the yen that is stagnant, but also Europe. On April 14, the European Central Bank announced that it would keep its three key interest rates unchanged. This has been interpreted as a continuation of a prudent and gradual process of monetary normalization due to concerns about an economic downturn.
Europe's annual inflation rate climbed to 7.5% in March due to Europe's passive situation in the Russian-Ukrainian conflict, economists have warned of a decline in the European economy and rising inflation, and the ECB's interest rate hikes have disappointed the market with the same carelessness as Japan, which has also pushed the euro to continue to fall. This point is quite similar to the yen, Japan's national debt is heavy, the authorities do not dare to raise interest rates like the United States to fight the depreciation, but instead want to release water pressure, which is more likely to worsen the depreciation.
Notably, during the global financial turmoil in March 2020, the largest overseas dollar liquidity provided by the Fed was occupied by Japanese banks, which indicates the importance of Japan in the global dollar system, and Japan is the largest external purchaser of U.S. Treasuries. If the BoJ and the Fed do not coordinate their positions, the further acceleration of the yen depreciation will weaken Japan's demand for US Treasuries and will further increase the collateral damage to US financial markets.
Editor-in-charge: Gui Yanmin