The Asian currency defense war escalated, the yen fell below the 155 bottom line, and Indonesia took the lead in raising interest rates to stabilize the exchange rate

When the Japanese government will intervene in the foreign exchange market is becoming a hot topic in the global financial market.

As of 13:00 on April 25, the yen fell to 155.70 yen per dollar against the dollar, and once hit the lowest point in the past 34 years at 155.74. This means that the yen exchange rate has once again fallen below the bottom line of Japanese government intervention as determined by financial markets. A Wall Street hedge fund manager told reporters.

On April 23, Bank of America released its latest report, pointing out that the yen fell to 155 against the US dollar, which is the bottom line for the Japanese Ministry of Finance to intervene in the foreign exchange market. If the yen exchange rate falls below this level, the Ministry of Finance will intervene in the foreign exchange market. If Japan's Ministry of Finance does not intervene, financial markets could quickly push the exchange rate down to 160.

Bank of America believes that unlike the large-scale consumption of US dollar reserves to intervene in the foreign exchange market from September to October 2022, the Ministry of Finance will adopt a smaller-scale but more frequent intervention in the foreign exchange market to reverse the decline of the yen exchange rate.

However, in the past two days, the exchange rate of the yen against the US dollar has fallen below the 155 integer mark, and the "Japanese government's intervention in the foreign exchange market" expected by the market has not been fulfilled for a long time.

The Wall Street hedge fund manager revealed that the current international financial market is paying attention to the monetary policy meeting held by the Bank of Japan on April 25-26, and does not rule out a surprise interest rate hike by the Bank of Japan as an alternative to intervening in the foreign exchange market.

After all, Bank Indonesia has unexpectedly raised interest rates by 25bp to 6.25% on 24 April in the face of a broadly rapid decline in Asia-Pacific currencies due to the recent surge in the US dollar index.

Bank Indonesia Governor Perry Warjiyo said the decision to raise interest rates was a "pre-emptive and forward-looking move" aimed at stabilizing the rupiah's exchange rate. He also said that he would continue to use all available tools to keep the rupiah stable.

As a result, the rupiah rose 0.5% against the US dollar.

However, there are still many controversies in the financial market about whether the interest rate hike can effectively stop the decline of Asia-Pacific currencies such as the yen and the Indonesian rupiah.

Japan Government 干预汇市缘何 "言行不一"

In the view of many industry insiders, the yen fell below 155 against the US dollar, which was also within market expectations.

"Since April, in the face of the continuous decline in the yen exchange rate, the Japanese government has repeatedly hinted that it will intervene in the foreign exchange market, but it has not taken action for a long time, which has emboldened speculative capital to short the yen. The aforementioned Wall Street hedge fund manager noted. This has also caused global investment institutions to continuously lower the bottom line of the Japanese government's intervention in the foreign exchange market - from the initial 150, to 152 in mid-April, and then to 155. Since the beginning of this week, more and more investment institutions have raised the bottom line of the Japanese government's intervention in the foreign exchange market to 160.

JPMorgan Chase & Co. strategy analyst Julia Wang said that the yen's fall to 160 against the dollar may be a new bottom line for the Japanese government to intervene in the foreign exchange market. However, the key is how the yen exchange rate falls to 160, and if the yen exchange rate falls below the 160 integer mark in a disorderly and rapid manner, the possibility of the Japanese government intervening in the foreign exchange market will increase.

Mingze Wu, a foreign exchange trader at Singapore's StoneX Financial, believes that the yen may fall towards 160 against the dollar, and the probability of the Japanese government intervening in the currency market will be higher.

Quentin Fitzsimmons, global fixed income portfolio manager at T. Rowe Price Group, expects that the yen may fall to 170 against the dollar in the future, which means that speculative capital still has a lot of room to profit from shorting the yen.

Closely related to the continuous lowering of the bottom line of the Japanese government's intervention in the foreign exchange market by investment institutions is the arbitrage sentiment of speculative capital shorting the yen, which is higher and higher.

In the view of a foreign exchange broker, the current speculative capital shorting the yen has a higher chance of winning, first, the Fed interest rate cut delayed the expectation of heating up, the dollar index hovered between 105.5 and 106.5 high, so that the yen exchange rate under greater depreciation pressure; second, the 10-year U.S. Treasury yield is running at a high level, which further widens the interest rate differential disadvantage of the yen against the dollar, resulting in the downward pressure on the yen is increasing day by day; third, the tension in the Middle East has eased in recent days, which has also weakened the attractiveness of safe-haven currencies such as the yen.

According to the data, as of 13 o'clock on April 25, the difference between the yield of 10-year Japanese government bonds and U.S. Treasury bonds in the same period reached 377 basis points.

The latest report from the U.S. Commodity Futures Trading Commission (CFTC) showed that hedge funds' short positions in the yen remained near their highest level since January 2018 in the week ended April 16.

The reporter learned that although the finance ministers of the United States, Japan and South Korea issued a joint statement on April 17 admitting that they were concerned about the recent depreciation of the South Korean won and the yen, and agreed to cooperate closely on the development of the foreign exchange market, most investment institutions believe that the probability of joint intervention in the foreign exchange market by the three countries is not high.

"After all, the joint intervention of the three countries may boost the yen and the won exchange rate in the short term, but the effect of the joint intervention will be quite short-lived as the interest rate differential between the yen and the won against the dollar remains at a record high and Japan and South Korea are hesitant to raise interest rates aggressively. The forex broker noted.

He pointed out that according to the analysis of the recent remarks made by Japanese government officials, the Japanese government may believe that the recent sharp depreciation of the yen is caused by the strengthening of the US dollar, and the corresponding willingness to intervene in the foreign exchange market has decreased; in addition, the Japanese government pays more attention to whether the yen exchange rate has disorderly fluctuations and abnormal declines, rather than holding on to a specific exchange rate. In the current situation where the strengthening of the US dollar has led to a sharp decline in Asia-Pacific currencies, the Japanese government may believe that the recent decline in the yen exchange rate is not disorderly and abnormal, and the possibility of intervening in the foreign exchange market will fall further.

This will inevitably trigger speculative capital to increase bets on shorting the yen, betting that the yen's exchange rate will hit new lows to obtain more lucrative returns.

Mingze Wu bluntly said that even if the yen falls to the 170 integer mark against the dollar, it may not trigger a strong reaction from the Bank of Japan.

Indonesia's central bank took the lead in raising interest rates to stabilize the exchange rate

It is worth noting that while the Japanese government was hesitant to intervene in the foreign exchange market, Bank Indonesia took the lead in raising interest rates to stabilize the exchange rate.

On 24 April, Bank Indonesia unexpectedly raised interest rates by 25bp, raising its benchmark interest rate to 6.25%.

Affected by the Asian financial crisis in 1997, Southeast Asian countries have paid more and more attention to the stability of foreign exchange reserves, and rarely use foreign exchange reserves to intervene in the foreign exchange market to stabilize the exchange rate, which makes Southeast Asian central banks more interest rate hikes and cross-border capital flow controls as an important way to stabilize the exchange rate.

Now, the Bank of Indonesia has chosen to raise interest rates unexpectedly to stabilize the exchange rate, which to some extent also shows that the Indonesian government is aware of the sharp depreciation of the rupiah by about 5% this year, which may have a potential impact on Indonesia's own financial stability and economic growth.

Goldman Sachs previously released a report pointed out that in the recent sharp depreciation of emerging market currencies, Indonesia's central bank needs to actively defend the stability of the national currency exchange rate, because Indonesia is an economy with a current account deficit, high inflation rate and high external debt level, and a sharp depreciation of the rupiah may pose a greater risk to economic stability.

However, there are also mixed views on whether Indonesia's surprise interest rate hike will reverse the weakening trend of the rupiah. Many investment institutions believe that the two keys to whether the rupiah exchange rate can stabilize are changes in the external environment - whether the Federal Reserve can enter the interest rate cut cycle as soon as possible, and second, the flow of funds in the internal financial market - whether Indonesia's unexpected interest rate hike can attract more overseas capital into the Indonesian financial market.

"Considering the current Fed's repeated delay in the pace of interest rate cuts has strengthened the US dollar, and the continuous escalation of international geopolitical risks has led to a decline in capital investment risk appetite, the rupiah will still face considerable depreciation pressure in the future. In particular, interest rate hikes may weaken market expectations for Indonesia's economic growth and will also bring new downward pressure on the rupiah. An emerging market investment fund manager told reporters.

Jeffrey Zhang, emerging markets strategist at Crédit Agricole CIB, believes that in order to continue to stabilize the rupiah exchange rate, the central bank will continue to maintain a hawkish stance and will further optimize the central bank rupiah Indonesia securities (SRBI) to attract foreign capital inflows, and even re-implement exporters' profit settlement measures to strengthen the rupiah exchange rate in the onshore market.

A number of industry insiders pointed out that the Japanese government will also take an extremely cautious attitude towards raising interest rates and stabilizing the exchange rate. The reasons for this are: first, the interest rate hike will exacerbate the sustainable risk of Japan's huge debt, which will bring new hype to the depreciation of the yen, and second, the Japanese government also needs to comprehensively assess the specific impact of the interest rate hike on Japan's economic growth and inflation rebound before making a final decision.

The above-mentioned emerging market investment fund manager told reporters that the current 10-year U.S. Treasury yield hovered around 4.65% due to the Fed's expectation of delaying interest rate cuts, and the cumulative increase since April reached 46 basis points, considering that the 10-year Japanese government bond yield has only risen by about 16 basis points since April, which means that the Bank of Japan needs to raise interest rates by at least 30 basis points at one time to erase the interest rate differential between the yen and the dollar since April.

"However, the Bank of Japan is not necessarily going to raise interest rates aggressively, as the Japanese government still wants to maintain a relatively loose monetary policy to support its own economic growth, and on the other hand, aggressive interest rate hikes will exacerbate Japan's debt sustainability risks. He analyzed.

Fitzsimmons said the Japanese government does not want the national currency to appreciate significantly. Even if the Bank of Japan raises interest rates, it may not be by much, as it would raise concerns about debt sustainability.

According to data from the Ministry of Finance, as of the end of last year, Japan's total government debt reached a record high of 1286.452 trillion yen. This means that the Bank of Japan's aggressive interest rate hike will lead to a corresponding rapid increase in the proportion of interest payments on Japanese government bonds in fiscal revenue, which will not only impact Japan's active fiscal policy and economic growth fundamentals, but also may affect the Japanese government's various social welfare expenditures.

"Most investment institutions believe that the probability of the Bank of Japan not raising interest rates this week is higher, because intervening in the currency market to reverse the decline of the yen may be a more appropriate option than raising interest rates. The emerging market investment fund manager noted.

"If the Bank of Japan does not raise interest rates this week, speculative capital is likely to sell the yen further, pushing the yen to fall towards 160 soon. The aforementioned foreign exchange broker analyzed.

Bank of America pointed out that financial markets need to be prepared - when the yen falls below the 165 mark against the dollar, the Bank of Japan may consider raising interest rates in July to stabilize the exchange rate.

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