Recently, Japan's economy has fallen into an unprecedented triple kill crisis of stocks, bonds, and foreign exchange. Since the Bank of Japan announced the end of its eight-year negative interest rate policy, the yen exchange rate has plummeted to a new 34-year low. Today, 1 dollar can be exchanged for 154 yen, making the yen the worst performer among the world's major currencies. This anomaly has raised widespread concern: why does the yen move contrary to common sense in economics during the interest rate hike cycle?
To solve this mystery, it is necessary to start with the special nature of the Japanese economy. Over the past 20 years, most countries around the world have been in a cycle of loose monetary policy aimed at stimulating the economy and avoiding deflation. However, in this easing trend, Japan has become an outlier. Despite the pressure of over-issuance of currencies and soaring prices in Europe and the United States, prices in Japan have remained stable, and the cost of living is almost the same as it was 20 years ago. So, where does all this extra money go?
The answer may lie deep in the foreign exchange and overseas markets. As Japan has maintained ultra-low interest rates for a long time, the yen has become a popular currency for global arbitrage. When the dollar is strong or overseas markets are hot, investors borrow the yen to invest because the cost is almost zero, and when the situation is volatile, the yen becomes the darling of safe-haven funds. According to statistics, the average daily trading volume in the global foreign exchange market is as high as 7.5 trillion US dollars, of which the Tokyo market accounts for 30% of the share, and 90% of the transactions involve the swap of the yen and the US dollar.
However, with the Bank of Japan announcing a rate hike, this balance began to be broken. Capital markets are starting to worry about whether Japan will continue to raise interest rates, and in order to reduce losses before the rate hike, investors are rushing to repatriate the yen to the Bank of Japan, causing a surge in the supply of yen. More seriously, international capital began to collectively short the yen, seeing it as a tool to make huge profits. Institutional short bets on the yen have soared to a six-year high, and the number of short yen contracts held by hedge funds and asset managers has also hit a new high since the financial crisis, the data showed.
Against this backdrop, the Japanese economy is facing unprecedented difficulties. Continued rate hikes could lead to the collapse of Japan's huge government bond market, and without a rate hike, inflationary pressures will be unbearable. The root cause of this dilemma lies in the fact that the Japanese economy has long been overly dependent on external factors, resulting in a serious lack of self-regulation capacity. Now, as the global economic landscape changes, the Japanese economy is once again at a crossroads, and it remains to be seen where its future holds.