This is the headquarters of the Bank of Japan photographed in Tokyo, Japan, on March 19. Photo by Xinhua News Agency reporter Zhang Xiaoyu
TOKYO, April 23 (Xinhua) -- The yen traded against the U.S. dollar at 154.85 yen per U.S. dollar on the 22nd, setting a new record for 34 years and continuing to approach the "dangerous" threshold of 155 in the eyes of industry insiders. Japanese Finance Minister Shunichi Suzuki said on the 23rd that "no options will be ruled out" to respond. According to Japanese media, he is hinting that the government will not hesitate to intervene in the foreign exchange market to prevent further depreciation of the yen.
Why has the yen, as a safe-haven currency, fallen sharply recently? What will be the impact of a sharp depreciation? How long will the yen fall? Xinhua News Agency reporters will explain the situation for you.
Highly correlated with aggressive Fed rate hikes
Since the beginning of this year, the currencies of many G20 countries have continued to fall against the US dollar across the board, with the yen falling by about 9%, almost as much as the Turkish lira. As one of the international safe-haven currencies, the decline of the yen has attracted attention.
The current round of yen depreciation actually began in early 2022. The Federal Reserve, which carried out an unprecedented monetary "big release" during the new crown epidemic, began to raise interest rates aggressively in 2022 in a "sharp turn" to deal with rising inflation, causing serious negative spillover effects on the world economy, and a number of non-US currencies depreciated sharply, and many central banks were forced to raise interest rates "accompanimently", but the Bank of Japan, which has always followed the trend of the United States, was constrained by the domestic deflationary situation and adhered to the negative interest rate policy.
As the interest rate differential between the yen and the dollar widened rapidly, the yen exchange rate plummeted: 115 yen per dollar at the beginning of 2022 fell to nearly 152 yen in October of the same year, a decline of more than 30% in the process. The Japanese government was forced to intervene three times to boost the yen exchange rate by selling dollars and buying yen.
Pedestrians walk past a real-time exchange rate display board on a street in Tokyo, Japan, September 26, 2023. Photo by Xinhua News Agency reporter Zhang Xiaoyu
Last year, the Bank of Japan changed its leadership at the end of the term, which was seen as a signal that Japan was about to tighten monetary policy. In March, the Bank of Japan (BOJ) announced the end of its eight-year negative interest rate policy, but only raised its policy rate from minus 0.1% to a range of 0 to 0.1%, while pledging to maintain accommodative monetary conditions. The tightening was not as severe as the market expected, which only exacerbated the depreciation of the yen.
The U.S. Department of Labor released the March consumer price index (CPI) data on the 10th, showing that U.S. inflation has not cooled. Market expectations for a U.S. interest rate cut within the year have once again dropped sharply. As a result, the yen weakened sharply against the US dollar in the foreign exchange market, hitting the lowest record since 1990 for many consecutive days.
The depreciation has shrunk people's wallets
In order to pursue higher returns, personal funds in Japan are flowing overseas. Overseas institutional investors engaged in arbitrage trading and borrowed a large amount of yen for foreign currency for investment, which also exacerbated the depreciation of the yen. Japan's Ministry of Finance and Finance Officer, Mato Kanda, has repeatedly intervened verbally in recent days, saying that there is "obvious speculation in the market and cannot be tolerated".
Japanese Finance Minister Shunichi Suzuki said on the 23rd on the depreciation of the yen against the US dollar, "For excessive fluctuations, we will not rule out any options and make appropriate responses." Japan's Kyodo News Agency interpreted that Shunichi Suzuki hinted that he would not hesitate to intervene in the foreign exchange market to prevent further depreciation of the yen.
In addition, since the beginning of this year, the Japanese stock market has soared, and many people think that the Japanese economy is going to take off, but in fact, most of the people who buy Japanese stocks are foreign institutional investors, and the Japanese people have not become loose in their hands. Hayari Shirai, a professor at Keio University, said in an earlier interview with the media that the excessive depreciation of the yen has reduced the purchasing power of consumers, and the investment and production of companies have slowed down.
This is a clothing store photographed on August 15, 2023 in Uenoichi Shopping Street, Tokyo, Japan. Photo by Xinhua News Agency reporter Zhang Xiaoyu
As of March this year, Japan's core consumer price index (CPI) rose year-on-year for 31 consecutive months, but this round of inflation has not been accompanied by high domestic demand. In fact, Japan's wage growth has not kept pace with price increases, and real wage income has fallen year-on-year for 23 consecutive months. In the words of Uniqlo President Masashi Yanai, it is normal for ordinary people to be reluctant to buy things in this situation. According to data from the Cabinet Office of Japan, as of the fourth quarter of last year, personal consumption, which accounts for more than half of Japan's economy, has been negative for three consecutive quarters.
As real incomes shrink, consumers tend to opt for cheaper items: beef sales have plummeted in supermarkets, chicken has been sought-after, and domestic shipments of ultra-thin TVs in Japan have fallen for the third year in a row. Recently, affected by the tension in the Middle East, international crude oil prices have risen again. Nobuhide Kiuchi, an economist at the Nomura Research Institute, believes that the rise in energy prices and the depreciation of the yen will cause the Japanese economy to encounter stronger headwinds, and rising prices may further suppress personal consumption, thereby exacerbating Japan's stagflation.
How long will the yen fall?
The depreciation of the yen is not all caused by the aggressive interest rate hikes in the United States, and some long-standing structural problems in the Japanese economy have also become factors driving the depreciation of the yen.
First of all, Japan is heavily dependent on imports for important resources such as energy, food, and raw materials, and its demand for the US dollar continues to increase. After the Fukushima nuclear power plant accident in 2011, Japan's domestic nuclear power plants were shut down, and nuclear power, which originally accounted for about a quarter of Japan's annual power generation, fell to zero in 2014.
A pedestrian walks past the Bank of Japan headquarters in Tokyo, Japan, March 19. Photo by Xinhua News Agency reporter Zhang Xiaoyu
Second, Japan's trade in goods and services continues to run deficits. According to the latest data, Japan's trade in goods has been in deficit for three consecutive fiscal years from 2021 to 2023, and although the situation in 2023 has eased significantly from the previous year, the total deficit in goods and services is still 9.8 trillion yen.
A number of experts pointed out that although the situation of inbound tourism is good against the background of the depreciation of the yen, with the in-depth development of AI technology, Japan's service fees paid overseas will increase significantly, and the problem of service trade deficit will become more obvious.
Third, although the returns from overseas investment are high, the repatriation of funds tends to decrease. There is a saying in Japan that "there is a Japan overseas", but due to the sluggish domestic demand and shortage of manpower, Japanese companies continue to expand the scale of overseas investment, and after bringing huge profits, they lack the motivation to return to invest and choose to keep their profits overseas.
When it comes to the future trend of the yen exchange rate, experts analyze that although the yen is in an extremely weak state at present, the trend of major central banks such as the Federal Reserve will cut interest rates in the future and the Bank of Japan will slowly raise interest rates will not change. Ding Ke, chief researcher at the Institute of Asian Economy, a foreign trade organization of Japan, believes that the appreciation of the yen is inevitable in the future, but the Tokyo stock market may face resistance if it continues to rise. Although Japan's position in some parts of the supply chain is still irreplaceable, it is difficult to change the general trend of Japan's economic contraction in the long run due to the low birthrate and aging population. (Reporter: Liu Chunyan; Editor: Shen Min, Lu Yu, Wang Fengfeng)