In an environment of rising global inflation, Japan, which had almost stagnated price growth for the past three decades, is finally feeling the pressure of inflation. On Friday, Japan's Ministry of Internal Affairs released data showing that Japan's CPI reached 3% in September, the first time since 1991 that it has reached this position after excluding tax hike exceptions.
The day before, the yen fell below the 150 key level against the dollar, hitting a new low since 1990. 150 is widely seen as an important psychological barrier for the yen, and breaking through this level may increase pressure on Japan to take further action.
Japan's food self-sufficiency rate is only less than 40%, and its dependence on energy imports is as high as 90%. In yen terms, both crude oil and wheat have risen by about 40% this year.
The yen fell to the 150 mark against the dollar and dumped U.S. Treasuries
On the 20th, the exchange rate of the US dollar against the yen fell below the 150 mark, hitting a new low since 1990. 150 is widely seen as an important psychological barrier for the yen, and breaking through this level may increase pressure on Japan to take further action.
On the same day, the Bank of Japan announced a new bond-buying program, which is the first non-routine bond purchase since the release of the bond-buying program in the fourth quarter of this year. The Bank of Japan remains in place of its yield curve control policy (YCC), seeking to keep the yield on its benchmark 10-year government note below 0.25% to boost economic growth. The Bank of Japan's continued bond purchases widened the US-Japan interest rate differential. As a result, the yen hit 150.08 against the dollar on Thursday, a 32-year low.
After the yen fell below the much-watched 150 mark, the market is highly concerned about whether the Ministry of Finance will intervene in the market. Finance Minister Shunichi Suzuki reiterated on Thursday that the Japanese government would take appropriate measures to deal with excessive volatility in the currency market. "The recent rapid unilateral decline of the yen is not desirable. We absolutely cannot tolerate excessive volatility driven by speculative trading. We will continue to take appropriate measures to combat excessive volatility while paying close attention to the latest developments in the currency markets. ”
It is worth noting that Bank of Japan Governor Haruhiko Kuroda reiterated on Friday that he will continue to implement the current monetary policy, steadily achieve the BOJ target, and will continue to ease monetary policy to raise wages.
In response to currency volatility, Japan's finance ministry spent 2.8 trillion yen ($19 billion) last month to intervene, buying yen and selling dollars. This is the first time since 1998 that the Japanese government has taken action in the market to support the yen. However, under the influence of the continued widening interest rate differential between the United States and Japan, the yen has erased the gains after last month's intervention. In addition to public intervention in the market, the market is currently speculating that Japan's Ministry of Finance has taken a "stealth intervention" operation to stabilize the market.
When the depreciation of the yen hit a 32-year low, the dumping of US bonds became the "normal operation" of Japan, the largest overseas "creditor" of the United States. After August this year, Japan's US Treasury holdings will continue to decline and may reach further new lows. The U.S. Treasury Department released its International Capital Flows Report (TIC), showing that Japan's holdings of U.S. Treasuries were $1.1998 trillion in August, the lowest since December 2019, and Japan's U.S. Treasury holdings decreased by $34.5 billion month-on-month in August from July, the second consecutive month of reduction.
Nikkei Chinese pointed out that in addition to the excessive depreciation of the yen may lead to a decline in Japan's national strength, the price of imported energy and food has risen, the attraction of overseas labor has decreased, and overseas travel has become more expensive, Japanese individuals are increasing their investment in foreign exchange deposits and overseas stock markets, and the hidden concern that about 1000 trillion yen of deposits will flow overseas is gradually strengthening.
Why is the yen so weak this year?
Why has the yen fallen so badly this year that it is almost powerless in the G7 currency? This answer is actually very simple, and it can even be summarized in a chart: spread!
As the chart above shows, the dollar's rise against the yen this year is almost fully synchronized with the spread between the US/Japanese 10-year Treasury yields.
With the Fed raising the target range of the federal funds rate five times so far this year, the rate hike has reached a rare 300 basis points in just half a year, and the 10-year Treasury yield, which has the "anchor of global asset pricing", has never stopped rising. On Thursday, the benchmark U.S. Treasury yield rose further above the 4.2 percent mark, the highest since the 2008 financial crisis.
In the world, the most sharp contrast with the rise in US bond yields is naturally the first to push the Japanese bond yield, which is forced to maintain the surface "calm and calm"...
As the only central bank of advanced economies that still adheres to an accommodative monetary policy stance, the Bank of Japan has taken yield curve control policy as the core of its monetary policy while maintaining negative interest rates, stipulating that the short-end interest rate is around -0.1%, the 10-year interest rate is around 0% (the upward and downward fluctuation range is ±0.25%), and the interest rate ceiling of Japan's 10-year government bonds is firmly limited to 0.25%.
In the foreign exchange market, profit-seeking effect is often placed in the first place at the transaction level. Such a stark yield differential between the United States and Japan has undoubtedly made carry trades between the dollar and the yen particularly prevalent. Forex traders naturally borrow yen with lower interest rates, then buy and hold higher yielding US dollars to earn interest rate spreads.
Although the Japanese authorities intervened in the currency market for the first time since 1998 last month, directly selling the dollar to buy the yen, costing nearly $20 billion, and warning traders not to test their resolve, they were still completely unable to resist the decline of the yen.
Against this background, it is not surprising that the USD/JPY exchange rate has been able to rise from the 110 mark at the beginning of the year all the way above the 120, 130, 140 and even now 150 mark.
Beware of the global market "nuclear explosion" button
Japanese policymakers now face a dilemma, either abandoning the YCC policy framework or facing the continued depreciation of the yen.
According to the Financial Associated Press, where is the last "anchor" that can prevent global bond yields from soaring further? The answer, obviously, is not in the US or Europe, but in Japan – lies in the BOJ's long-standing yield curve control (YCC) policy.
Now, the suspense is already in the question of whether the Bank of Japan, under the pressure of a sharp depreciation of the yen, will finally cut off this "iron anchor" under the pressure of a sharp depreciation of the yen and cancel the YCC policy, which is currently increasingly questioning.
Bloomberg FX strategist Ven Ram has previously said that high inflation in the United States is likely to force the Fed to continue to raise interest rates and lead to inflation-adjusted bond yield differentials that are more favorable to the dollar, and there is actually no third option (Japan).
Huatai Securities analysts have also mentioned in the research report that as the US-Japan interest rate differential widens, the Bank of Japan will face greater challenges in insisting on yield YCC. Even if YCC can be sustained in the short term, it is difficult to maintain it in the long term.
And if the Bank of Japan does this without sending a signal to the market in advance, the shock wave caused by this event is likely to be no less than the British mini-budget that Truss detonated the global capital market this autumn, and even compared to the "Swiss franc storm" that shocked the global foreign exchange market in 2015.
Comprehensive Securities Times, Cailian
This article originated from the financial community