The yen has been depreciating recently. In overseas markets, the view that Japan will not raise interest rates further in the near future has further spread.
There is even a perception that this is a "high-level tactic" of the Bank of Japan: on the one hand, it is pretending to be forced to retreat by the depreciation of the yen, and at the same time paving the way for the normalization of monetary policy.
What is the endogenous logic of this round of depreciation of the Japanese yen, and is it trading the depreciation of the yen for a certain recovery of the Japanese currency economy?
In this regard, Yicai interviewed Xing Yuqing, a professor at the National Graduate Institute for Policy Research in Japan. Xing Yuqing told reporters that the goal of the Bank of Japan is very clear, that is, it hopes that "the Japanese economy will move towards a sustainable 2% inflation target", and the central bank's monetary policy should consider economic growth, and the exchange rate itself is not the goal of monetary policy.
At the same time, in order to revitalize Japan's manufacturing industry, Japanese policymakers and scholars also believe that there is no need for Japan to maintain a strong yen, and if interest rates are raised too quickly, it may also put pressure on small and medium-sized regional banks in the middle of the capital that hold a large number of Japanese government bonds.
The internal logic of the continuous depreciation of the Japanese yen
CBN: The yen has continued to depreciate recently. On April 29, the yen briefly fell below an all-time low of 160 yen per dollar against the US dollar, before rebounding in the afternoon. Why does the Bank of Japan have no intention of responding to the depreciation of the yen through monetary policy?
Xing Yuqing: The Bank of Japan's goal is very clear, that is, it wants "the Japanese economy to move towards a sustainable 2% inflation target", and the central bank's monetary policy should consider economic growth, and the exchange rate itself is not the goal of monetary policy.
Overall, Japan's aging population and declining birthrate have become a structural phenomenon, which is a fact that is difficult to change by any policy, which has also led to the shrinking of Japan's aggregate demand, and the main source of Japan's future economic growth will be overseas demand. The so-called overseas demand obviously has a positive effect on Japanese companies to enhance their competitiveness overseas in the case of the depreciation of the Japanese yen, and overseas tourists who travel to Japan and spend in Japan also increase Japan's income.
At the same time, Japan is currently trying to revitalize its domestic industry and manufacturing industry, and if we look back at the "industrial hollowing out" that Japan has experienced, we can see that it has also been affected by the exchange rate.
For example, in the field of semiconductors, Japan's "dynamic memory" products once beat their American counterparts, but Japan has since completely withdrawn from this industry, and one of the reasons is the appreciation of the Japanese yen after 2008.
In Japan, policymakers and academics who want to revitalize the country's semiconductor industry and hope for the reshoring of the industry do not see the need for Japan to maintain a particularly high yen, as it will be detrimental to Japan in the long run. For example, through news reports, it can be seen that TSMC has never complained about the high cost of Japan when it invests in Japan.
Overall, the depreciation of the yen is good for the Japanese economy, but there are also disadvantages. Because Japan is a resource-poor country, oil, natural gas, coal and even wheat have to be imported, which will lead to higher prices in Japan. However, it should be noted that oil prices and natural gas prices have fallen back from their highs in 2022. The decline in the price of resources has actually hedged the current currency depreciation to some extent.
Recent analysis by the Bank of Japan shows that if the factors of currency depreciation and resource price increase are removed, Japan's inflation rate is less than 1.92%, and the inflation rate that the Bank of Japan wants is actually hoping for a kind of increase in demand, that is, because demand exceeds supply, so that goods will rise, but this motivation is not there.
CBN: Why is it so hard to get such economic momentum?
Xing Yuqing: On the one hand, there are demographic reasons. In 2023, Japan's population will decrease by about 800,000 and demand will continue to shrink, and on the one hand, it is unlikely that the sustained price increase that the Bank of Japan hopes will promote through wage increases.
In the past two years, Japanese companies have completed a round of commodity price adjustments, and if they do not take the initiative to adjust in the future, they will actually have to be driven by demand. When the currency depreciates, companies need to pay more wages, which can encourage employees to spend, which can also increase demand.
However, I personally believe that the recent increase in wages in Japan is far from sufficient. This is actually a big problem for Japan: Japanese companies do not lack capital, but they neither invest nor pay salaries, and they put it in the United States to eat interest.
Therefore, Bank of Japan Governor Kazuo Ueda and former Bank of Japan Governor Haruhiko Kuroda have repeatedly said that what Japan needs is demand-driven price growth driven by rising wages, not inflation driven by costs such as rising energy prices, the latter is unsustainable, and the former is a virtuous circle.
Yicai: So in this round, Japan hopes to use the depreciation of the yen in exchange for a definitive recovery?
Xing Yuqing: Why did the Bank of Japan become very cautious this time? In 2003, when the Japanese economy had just recovered, the Bank of Japan quickly withdrew from the quantitative easing policy at that time, so this round of Japan did not want to withdraw from the quantitative easing policy as soon as possible and stifle Japan's economic growth.
Another problem, which is rarely mentioned, is that if interest rates are raised too quickly, many small and medium-sized banks will be under pressure. After the Federal Reserve raised interest rates rapidly, regional banks such as Silicon Valley Bank in the United States collapsed. If Japan raises interest rates quickly, some small and medium-sized banks and local banks in Japan will be under great pressure, because these banks hold a large number of Japanese government bonds, and if they raise interest rates too quickly, they may lose money and risk a banking crisis.
Japan's "psychological price" against the yen
Yicai: On April 29, investors sold yen to buy US dollars, and the exchange rate of the yen against the US dollar once depreciated to 160 yen per US dollar, a 34-year low since April 1990. Japan was a holiday, market participants were limited, and the depreciation of the yen accelerated amid low trading volumes. After that, the yen appreciated rapidly, and at one point the exchange rate reached 155.5 yen per dollar. Market sources said that the Japanese government and the central bank may have intervened in the foreign exchange market. What do you think about this?
Xing Yuqing: 1%-2% changes in the foreign exchange market are big events, and there is definitely strong intervention behind 5%-10% changes. One thing to note is that Japan, the United States, and South Korea issued a joint statement, and the Federal Reserve also agreed that the yen was excessively depreciated and not in line with fundamentals. This means that the U.S. will not accuse Japan of intervening, but will raise the issue if the U.S. believes that a strong dollar is bad for the U.S. economy.
This can be interpreted as saying that it does not matter whether the United States intervenes in Japan or not, and it depends on whether Japan is willing to intervene or not.
CBN: What is the "psychological price" of Japan?
Xing Yuqing: In 2022, in order to prevent the yen from depreciating too quickly, Japan used more than 9 trillion yen to intervene in foreign exchange three times, when the US dollar broke through the 150 key point against the yen, and after several interventions, the Japanese side made the yen return to 138-139 points, successfully preventing the yen from depreciating again. However, an objective condition at that time was that oil prices were also rising, which had an impact on the lives of ordinary Japanese people.
This year, the wave of price hikes in Japan has passed, and there is currently a government subsidy for oil prices, that is, a subsidy is paid when the average price of gasoline in Japan exceeds 170 yen per liter, with a ceiling of 5 yen per liter. As a result, the depreciation of the Japanese currency or rising prices has had a smaller negative impact on the Japanese people than before. Of course, there is a problem that if you travel abroad, Japanese people feel that their wallets are deflated.
Personally, I believe that the Japanese side has a psychological value of more than 150 for the exchange rate.
(This article is from Yicai)