The rebound after the collapse of the yen exchange rate has led to speculation of intervention, and the strength of the dollar has tested Asian currencies

Since the beginning of the year, the U.S. dollar has risen 4% against a basket of major currencies, and the U.S. dollar has strengthened on its own, sending headwinds to many national currencies, including the Turkish lira, the Indonesian rupiah, the Japanese yen, the South Korean won, the Philippine peso, the Australian dollar, the Canadian dollar, and many others. "The dollar is our currency, but it is your trouble". Nixon-era U.S. Treasury Secretary Connally once said something that still holds true today.

The central banks of Turkey, Indonesia, the Philippines and other countries have recently intervened to defend their currencies. The Bank of Japan remained on hold, but the yen hit rock bottom against the dollar. On April 29, the exchange rate of the yen against the US dollar in the overseas foreign exchange market briefly fell below the 160-1 mark, setting a new record since April 1990. Later in the day, the exchange rate rebounded rapidly, rising to the 155-to-1 level, sparking speculation of government intervention.

According to the Japan Broadcasting Association (NHK), on the afternoon of the 29th, the financial officer of the Ministry of Finance of Japan, Mato Kanda, was asked whether the government and the central bank had intervened in the market, and he refused to respond directly, saying that the negative impact of excessive volatility "cannot be ignored" and that "we will take appropriate measures as needed." Some believe that the Japanese government and central bank may have intervened in the market, but the speculative move is only temporary due to the market's skeptical attitude, the people said.

Previously, on April 26, the Bank of Japan decided to maintain the current monetary policy at the financial policy decision-making meeting, and the governor of the central bank, Kazuo Ueda, said that the depreciation of the yen has no significant impact on the current basic price inflation rate, and if the yen weakens in the future, the central bank will consider adopting monetary policy response. On the other hand, Asian currencies are under heavy pressure as concerns about long-term inflation in the United States have rekindled and the Federal Reserve has paused interest rate cuts.

Hearing the wind of the weak yen, overseas tourists flocked to Japan. According to statistics from the country's tourism bureau, the number of foreign tourists visiting Japan reached 3.08 million in March, setting a new record for a single month. According to the Japan Association of Department Stores, duty-free sales of department stores hit an all-time high of 45.9 billion yen in March. At the same time, the depreciation of the yen is also affecting the consumption dynamics of the Japanese people. According to Japanese media polls, the consumption budget of Japanese residents for the Golden Week in May this year was generally reduced by nearly 20,000 yen, and the impact of high prices overshadowed the impact of revenge consumption after the epidemic.

The sense of alarm about whether the Japanese government and the central bank will intervene in the market by selling the dollar and buying the yen is at an all-time high. The depreciation storm is not a crisis for Japan alone, and the Fed's delay in cutting interest rates will test Asian central banks.

It is difficult to solve the fundamental problem by intervening in the end

Japan's nominal GDP (gross domestic product) is expected to be surpassed by India in 2025 in dollar terms, according to forecasts released by the International Monetary Fund in April. Forecasts released in October last year said Japan would be overtaken by India in 2026, but it would be a year earlier due to the continued depreciation of the yen.

Hideo Kumano, chief economist at Japan's Dai-ichi Life Economic Research Institute, told Japanese media that the reversal between Japan and India was a year ahead of schedule, partly because of the failure of the Japanese government and the central bank's yen depreciation policy. "There is a limit to economic growth that relies on the depreciation of the yen," he said, noting that it is essential to boost productivity by saving labor and stimulating investment.

Economic growth that relies on the depreciation of the yen dates back to the Abe era, when Japan bottomed out in November 2012 with the introduction of "Abenomics", which stimulated the economy through ultra-loose monetary policy and stimulated exports with currency depreciation, and continued to grow for 71 months until October 2018. In the spring of 2013, the then governor of the Bank of Japan, Haruhiko Kuroda, took office and implemented a monetary easing policy in different dimensions, and for 10 years, he has adhered to a low interest rate policy that is contrary to the monetary easing policies of Europe and the United States.

Due to the Bank of Japan's full cooperation with the Abe government's fiscal policy, the economic circles once jokingly referred to the central bank led by Kuroda as a "subsidiary" of the Abe government. However, ultra-loose monetary policy has not helped Japan to truly break out of deflation, resulting in a false boom in financial markets in which the yen has fallen sharply and the stock market has risen rapidly.

The current round of yen depreciation began in early 2022, when the Federal Reserve raised interest rates aggressively in response to rising inflation, resulting in a sharp depreciation of many currencies, and many central banks were forced to raise interest rates, while the Bank of Japan maintained negative interest rates due to the domestic deflationary situation, causing the yen exchange rate to fall all the way, and the Japanese government intervened many times.

Until April last year, Kazuo Ueda took over as the governor of the Bank of Japan, which filled the expectations of the Japanese economic circles, because Ueda was the first scholar-turned-central bank governor in Japan after the war, and received a doctorate in economics from the Massachusetts Institute of Technology in the United States, where he studied under the well-known economist Stanley Fisher. Moreover, he is a supporter of the zero-interest rate policy and quantitative easing.

In the spring of this year, the Bank of Japan led by Ueda decided to end its negative interest rate policy and raise interest rates for the first time in 17 years, returning to a normal monetary policy. However, the Bank of Japan raised the policy rate to a level of about 0~0.1%, and the interest rate differential, which is more than 5% different from the United States, has not narrowed, and the degree of tightening is not as good as the market expects. Moreover, senior Fed officials have recently made remarks about delaying interest rate cuts, and the market believes that the expectation of a decline in US interest rates has further weakened. In view of the perception of the widening interest rate differential between Japan and the United States, there is a significant trend of buying the dollar and selling the yen in the New York foreign exchange market.

In the storm of yen depreciation, the Japanese government and the central bank are expected to take action to prevent the exchange rate from falling, including buying yen, selling dollars, and raising interest rates by the central bank. However, the Bank of Japan (BOJ) held a monetary policy meeting on April 26, and the central bank maintained a wait-and-see attitude, further exacerbating the yen sell-off. However, on April 29, there was a suspected intervention by the Japanese authorities in the market.

Zhang Yulai, deputy dean of the Institute of Japanese Studies at Nankai University, pointed out to (www.thepaper.cn) that buying yen and selling dollars cannot solve the fundamental problem, for example, in September 2022, the Japanese government's intervention in the foreign exchange market in this way is only effective for a short time.

According to The Economist, many countries have ample foreign exchange reserves that can be sold to boost their currencies, such as Japan with $1.3 trillion, India with $643 billion, and South Korea with $419 billion. However, any relief is only temporary. Although the sell-off of the dollar in some countries when the Fed began to raise interest rates in 2022 slowed the dollar's strength, it did not stop the trend, and central banks and treasury departments have been reluctant to waste their dollar holdings on fruitless battles.

The Bank of Japan is currently hesitant to raise interest rates, Zhang Yulai analyzed two main reasons, the first is that the interest rate hike will push the yen towards an appreciation channel, so that the Japanese economic situation will reverse. Second, raising interest rates will also lead to the ineffectiveness of Japan's fiscal policy, and the fiscal burden will rise sharply.

Since the 90s of the 20th century, the proportion of total government debt to GDP has continued to rise, and the debt ratio is as high as 261% in 2022, mainly in government bonds, nearly half of which is held by the central bank. This also means that once the central bank raises interest rates, Japan's finances will face a higher burden on the debt. In March this year, Japan lifted its negative interest rate policy, and the interest payment expense of government bonds was included in 9.691 trillion yen, which is 30% more than in 2019, before the epidemic. The fiscal 2024 budget is one trillion yen less than that of 2023, but 35.449 trillion yen of new government bonds were issued to fill the shortfall in fiscal revenue.

Asian currencies on a rampage with the US dollar?

The yen's "swing" is approaching a critical point, and market participants who expect the Bank of Japan to take some measures in response to the depreciation of the yen hype "zero response from the Bank of Japan" have caused the yen to be sold off further. Some Japanese media pointed out that the Bank of Japan is paving the way for continuous interest rate hikes steadily, and if the Bank of Japan puts on a posture that it is forced to take action due to the depreciation of the yen to build a stage for the normalization of financial policy, it will be a smart move.

In fact, the BOJ and the government do not fully agree on the views of the government when dealing with the depreciation of the yen. Zhang Yulai believes that the Bank of Japan expects monetary policy to return to normal, while the Japanese government relies on low interest rates, and the central bank has to continue to maintain low interest rates under pressure from the government.

However, there have been different voices on the depreciation of the yen, especially import-related companies are under great pressure. This will be transmitted to the entire economy, as imported inflation will eventually dampen consumption, which in turn will lead to a downward turn. Next, the Ministry of Finance is expected to lead the exchange rate intervention (buying yen, selling dollars), and the second step is for the Bank of Japan to raise interest rates in the name of fighting inflation.

It is not only the Bank of Japan that is cautious at the moment, but the Bank of Korea has also been holding its base rate unchanged. According to the Wall Street Journal, G10 executives at Standard Bank said that the Bank of Japan could take steps to support the yen as early as this Friday (May 3) and may coordinate actions with the Bank of Korea to maximize its impact.

On April 17, the U.S., Japan, and South Korea Treasury Ministers Meeting was held at the U.S. Treasury Department building, and the joint statement of the meeting said that it "recognizes the serious concerns of Japan and South Korea about the recent rapid depreciation of the yen and South Korean won." U.S. Treasury Secretary Janet Yellen, Japanese Finance Minister Shunichi Suzuki, and South Korea's Minister of Strategy and Finance Choi Sang-mu agreed to "continue to hold close consultations on foreign exchange market trends." Suzuki also had a separate exchange of views with Yellen on the depreciation of the yen against the dollar. Suzuki told the media, "We have conveyed our stance on how to deal appropriately with excessive volatility [in the foreign exchange market]. ”

In South Korea, on the 16th of this month, the exchange rate of the South Korean won against the US dollar once fell below the 1,400 won mark. The analysis pointed out that the main reason is the recent continued strength of the US dollar and the intensification of turmoil in the Middle East, and the rise of market risk aversion. Japan and South Korea, which are highly export-dependent export-oriented economies, have been hit hard by the continued strength of the US dollar.

According to US media CNBC, Bank of America, the second largest commercial bank in the United States, said in a recent report that "we are not optimistic about any Asian currency", and many currencies have been affected by the postponement of the Fed's easing cycle and the continued strength of the dollar. And the Japan Times published an opinion piece on April 18 saying that Asian currencies cannot go on a rampage with the dollar, and that the region does have options, but none of them are easy.