Finance Associated Press, September 13 (Editor Xiaoxiang) As the dollar fell back against non-US currencies on Monday (September 12), but the dollar against the yen continued to rise, more and more investors in the foreign exchange market are beginning to look at the response of Japanese policymakers.
Because this is likely to determine whether the "currency defense war" launched in the context of the appreciation of the US dollar during the year will enter a new "chapter"...
Should I Intervene: Japan Revisits the Asian Financial Crisis of '98
The last time Japan intervened in the currency market to prop up local currency exchange rates was in 1998, when most of Asia's economies were hit by the financial crisis. Today, although the Asian region, including Japan, is still far from the danger of falling into a financial crisis, at least in the foreign exchange market, the sharp depreciation of asian currencies is enough to evoke people's memories of the dusty history of more than 20 years ago!
Since the beginning of this year, the yen's exchange rate against the dollar has hardly stopped. As of the end of last week, the yen's exchange rate against the US dollar had fallen by more than 20% during the year, falling not only more than G10 currencies such as the euro and the British pound, but also far more than Asian emerging market currencies such as the South Korean won, Indian rupee and Thai baht.
This has led more and more industry insiders to anticipate that Japanese policymakers may be one step away from re-intervening in the foreign exchange market in the yen.
Japan's deputy chief cabinet secretary, Seiji Kihara, said on Sunday's television program that Japan must take the necessary measures while paying close attention to excessive and unilateral changes in the exchange rate.
On Friday, Bank of Japan Governor Higashihiko Kuroda issued his strongest warning yet of a devaluation of the yen after meeting with Japanese Prime Minister Fumio Kishida. Kuroda said he did not want to see a rapid depreciation of the yen, which increased uncertainty about the company's operations. Subsequently, the yen exchange rate stabilized on the day.
On Tuesday, USDJPY was trading around 142.60, and traders are most concerned about whether the pair will rise above the 145 mark. Last week, USDJPY briefly touched 144.99, not far from the level of 146.78 before the joint Japan-US intervention in the currency market in 1998 to support the yen.
Hot discussion in the industry: 1.2 trillion US dollars of foreign reserves can not save the yen?
For Japanese policymakers, Japan's foreign exchange reserves are undoubtedly more abundant than when they last intervened in the foreign exchange market to support the yen. However, the outside world still believes that Japan's unilateral intervention is unlikely to succeed easily without the support of the United States.
If the Japanese government chooses to act alone to defend the weakening yen, it will be a major helper of the daily foreign exchange reserves accumulated since 1998, which have clearly outpaced the growth rate of the local currency market, which had $1.17 trillion in foreign currency reserves as of the end of August, compared with an average daily yen trading volume of about $479 billion in Tokyo. The ratio is currently 2.4 times, compared with 1.4 times in April 1998.
However, past experience suggests that despite the larger foreign reserve base, U.S. support will remain critical to the effectiveness of the Japanese government's intervention. In 1998, the Japanese government intervened near the end of the Asian financial crisis to boost the yen.
In April of that year, the Japanese government spent as much as $21 billion alone without the support of the United States to barely support the yen that month, which was almost 10% of Japan's foreign exchange reserves at that time. Since then, when the United States and Japan decided to take concerted action to support the yen in June of that year, Japan spent only $2.5 billion, which is almost a fraction of what it costs to act alone.
As a result, some economists say That Japan's decision-makers may still be reluctant to easily intervene in the market, especially without the support of the United States, because they will fear that the move could backfire and instead trigger a large number of short yen bets.
Given that Japan has previously joined the G7 agreement, which promised to let the market determine the exchange rate, the Japanese government will need to see a further sharp decline in the yen to justify its actions. In the case of its sole intervention in the currency market, the best situation may only be a temporary crackdown on speculators and a breathing space for the yen, but it is still difficult to change the general trend.
In fact, when speculators, including Soros, shorted the pound in 1992, Britain's currency market intervention didn't even make much of a splash. This is a wake-up call for Japanese policymakers: when the fundamentals are against you, there are limits to confronting the market.
Harumi Taguchi, chief economist at S&P Global Market Intelligence, said, "Actually I don't think Japan will intervene, and the biggest reason behind the weakness of the yen is the Fed's continued interest rate hikes." Unless that changes, I don't think the intervention will have an impact. ”
At this time, it is clear that the United States will not support Japan's intervention. Asked wednesday if the Treasury's position has changed since Treasury Secretary Yellen discussed the yen exchange rate in July, Treasury spokeswoman Michael Gwin said, "There is nothing more to add at the moment." ”
U.S. Treasury Secretary Janet Yellen said in July that G7 members such as Japan and the United States should let markets determine the exchange rate of their currencies. Intervention in the currency market is necessary only in rare and exceptional cases.
"The U.S. will not support Japanese intervention," noted Masaaki Kanno, chief economist at Sony Financial Group, "and the U.S. is happy with a strong dollar because it has helped remove some of the inflationary pressures." The simple solution is for the BoJ to raise interest rates, but the BOJ refuses to do so because of the lack of sustainable inflation, and Japan is actually cocooning itself. ”
"Ammunition" tension: Asia's "currency defense war" spends money like water
It is worth mentioning that at present, not only Japan will face the distress of whether to intervene in the foreign exchange market to stabilize the yen, but also the political and economic decision-makers in the entire Asian region are facing the test of the escalation of the Asian "currency defense war" under the threat of a strong using a strong dollar.
Standard Chartered Bank data shows that a closely watched measure of the adequacy of foreign exchange reserves in emerging asia (excluding China) ——- how many months a country can pay for imports with its foreign exchange reserves, has now fallen to about 7 months, the lowest level since the 2008 global financial crisis.
Keep in mind that the figure was about 10 months at the beginning of the year and as high as 16 months in August 2020, indicating that the "ammunition" reserves of emerging Asian countries to defend their currencies are gradually drying up. According to Standard Chartered Bank, the current foreign exchange reserves can meet India's import needs for about nine months, Indonesia for six months, the Philippines for about eight months and South Korea for seven months.
Divya Devesh, Singapore-based head of foreign exchange research at Standard Chartered Bank in Singapore, said last week that "the deterioration of the situation suggests that central banks' intervention in support of their currencies is likely to be more limited in the future." Overall, we expect central banks' foreign exchange policies to become less supportive. ”
Another agency figure also showed that Thailand's foreign exchange reserves fell the most as a percentage of gross domestic product (GDP) during the year, followed by Malaysia and India, which indicates that they are among the largest countries to intervene in the currency market during the year. India and Thailand's foreign exchange reserves have fallen by about $81 billion and $32 billion, respectively, this year. South Korea's foreign exchange reserves fell by $27 billion, Indonesia by $13 billion, and Malaysia by $9 billion.
Analysts pointed out that as the Fed's aggressive tightening policies spur more money back into the United States, central banks in emerging Asian economies have relied on foreign exchange reserves to protect their currencies from the appreciation of the dollar during the year. Any sign of slowing currency market intervention could further exacerbate the depreciation of Asian currencies, many of which have recently hit record or multi-year lows.
Vishnu Varathan, Mizuho Bank's head of economics and strategy in Singapore, said: "At the current rate of money burning, Thailand is still worrying, as is the Philippines, India, Indonesia, and even Malaysia, which was relatively better before, has become more dangerous." ”
In addition to Japan, many Asian economies have also recently tightened their control over the foreign exchange market. India's central bank Governor Shakticanta Das said the agency monitors the currency market almost daily, while the Bank of Korea also said it would take positive measures to stabilize the South Korean won exchange rate.
"They are in a dilemma," Varathan said, "a stronger dollar, the risk of recession and inflation exacerbated by exogenous price shocks – all of which together mean that Asia's emerging-market central banks cannot take for granted that the worst risks are over." "
This article originated from the Financial Associated Press