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On April 29, Beijing time, the yen exchange rate fell below 160 yen to 1 dollar, hitting a 34-year low. This was followed by a sharp rebound, reaching as high as 154.52 yen per dollar. However, in the next two trading days, the yen exchange rate continued to fall, and as of 6 p.m. on May 1, the yen once fell more than 158 yen to 1 dollar.
Japan's chief monetary officer, Mato Kanda, said in an interview with the media on April 30 that excessive currency fluctuations driven by speculation will have a negative impact on the economy and that the authorities will take appropriate actions to deal with such fluctuations.
Is speculative market arbitrage the "real culprit" that leads to the depreciation of the yen?
Tan Yaling, president of the China Foreign Exchange Investment Research Institute, believes that the current extreme depreciation of the yen does not coincide with Japan's stock market, economy and inflation, so the main reason for the depreciation is that the disparity between the yen and the US dollar gives the speculative market a huge arbitrage space.
In March 2022, in response to rising inflation, the Federal Reserve made a "sharp U-turn" and began to raise interest rates aggressively, at one point raising the federal funds target rate from 0.25% to 5.5%. It has caused serious negative spillover effects on the world economy, and many non-US currencies have depreciated sharply.
While many central banks have been forced to raise interest rates "accompanimently", the Bank of Japan, which has always followed the trend of the United States, has been constrained by the domestic deflationary situation and has insisted on a negative interest rate policy. Although the yen has also ended negative interest rates this year, there is still a large interest rate differential between the yen and the dollar.
As a result, in pursuit of higher yields, domestic capital has been flowing overseas. At the same time, overseas institutional investors engaged in arbitrage trading, borrowing a large amount of yen for foreign currency investment, which led to the extreme depreciation of the yen.
What is the negative impact of the sharp fall in the yen exchange rate?
Tan Yaling believes that although the depreciation of the yen is good for Japan's exports, Japan's economic structure has changed in recent years. Japan has quietly and gradually transformed from a major exporter to a major investor.
On April 17, Japan's Ministry of Finance released trade statistics. It shows that in fiscal year 2023 (April 2023 to March 2024), Japan's import and export trade balance deficit is 58,919 trillion yen, which means that Japan has had a trade deficit for three consecutive years.
At the same time, as Japan is an extremely resource-poor country, the depreciation of the yen has increased the cost of imports, and imported inflation has further increased Japan's prices, which in turn have further suppressed domestic consumption.
As of March this year, Japan's core consumer price index (CPI) rose year-on-year for 31 consecutive months. At the same time, Japan's wage growth has not kept pace with the price increase, and real wage income has fallen year-on-year for 23 consecutive months. 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 the Japanese economy, has shown negative growth for three consecutive quarters.
In addition, there is the part of Japan's overseas investment. Although the investment income of this part is huge, the actual return of funds tends to decrease.
Sluggish domestic demand and a shortage of manpower have left Japanese companies with little incentive to return to China for the huge profits they have brought from overseas investment. Coupled with the huge spread between the yen and the US dollar, most companies still choose to keep their profits overseas.
Therefore, the extreme depreciation of the yen this time has impacted the fundamentals of the Japanese economy. Tan Yaling said that the ups and downs of any currency are not conducive to the safe and stable development of a country, so it is understandable what kind of actions the Bank of Japan will take to smooth the extreme depreciation of the yen.
Did the Bank of Japan intervene?
According to Bloomberg's analysis of the BOJ's account, the bank may have conducted its first currency intervention since 2022 on April 29. In addition, according to the current account changes reported by the Bank of Japan on April 30, it is estimated that about 5.5 trillion yen of intervention has occurred.
Japan's chief monetary officer, Mato Kanda, did not say whether the Bank of Japan entered the market on the 29th, but he said that the Japanese Ministry of Finance will ensure that the results of operations are disclosed by the end of May.
On April 17, the U.S., Japan, and South Korea Treasury Ministers' Meeting was held at the U.S. Treasury Department Building. After the meeting, Japanese Finance Minister Shunichi Suzuki and US Treasury Secretary Janet Yellen exchanged views separately on the depreciation of the yen against the dollar. After that, Suzuki told the media, "We have conveyed our stance on appropriately dealing with excessive volatility [in foreign exchange markets]. ”
Therefore, there is speculation that the Japanese authorities' way to deal with the depreciation of the yen should be that the Ministry of Finance will first lead the exchange rate intervention (buying yen and selling dollars), and the Bank of Japan may raise interest rates in the name of fighting inflation in the next step.
However, some institutions have analyzed that from past experience, the impact of Japan's intervention alone on the foreign exchange market is far less than the impact of Japan-US joint action. At the same time, the Fed's interest rate cut will become a necessary condition and an "amplifier" for the Japanese government's intervention.
At 02:00 Beijing time on Thursday, the Federal Reserve will announce a new interest rate decision. The Fed is also expected to reiterate that interest rates will remain high for longer, and expectations for the first rate cut could be pushed back into the fourth quarter or even next year.
Therefore, the yen will remain extremely weak in the short term, but the trend of the Fed cutting interest rates in the future and the Bank of Japan slowly raising interest rates will not change. Tan Yaling said that the possibility of a strong yen appreciation may be something to be wary of, because a strong yen will lead to a depreciation of the dollar, which will be detrimental to the global economic recovery.
Take a look at the journalist: Huang Tao
Editor: Huang Tao
Editor-in-charge: Zhao Xin