In the view of Robin Brooks, the former chief monetary strategist of Goldman Sachs Group Inc., Japan's huge government debt - at least for the time being - may frustrate any efforts to support the yen.
According to the data of the International Monetary Fund, Japan's debt has expanded to more than 250% of its total economy, more than any other country. He said that this gave the Bank of Japan a strong incentive to keep interest rates low to reduce government costs.
The result is that unless the policy changes, it will offset any efforts to promote the appreciation of the yen. Because Japan insists on the extremely low interest rate that the United States gave up two years ago, the yen exchange rate is being dragged down.
Brooks said: "This is actually a debt problem. Too much debt has forced Japan into a very difficult situation, keeping interest rates low, thus transferring the financial difficulties to the yen." Brooks is currently a researcher at the Brookings Institution in Washington. "Even if you have a lot of debt, you can use your central bank to keep interest rates low. So Japan has been doing this, and Europe has also been doing this, but it has a cost."
The consequence for Japan is the sharp depreciation of the yen. Since the Federal Reserve (Fed) began to raise interest rates in the United States in March 2022, the yen has fallen by more than a quarter against the dollar. On Monday, the yen exchange rate rose sharply after falling sharply. Some people speculated that this was the first intervention by the Japanese government to support the yen since the yen rebounded from a 34 year low in 2022.
However, in view of the greater counter pressure, people doubt the effectiveness of these measures.
Although the Bank of Japan allows the interest rate to be slightly higher than zero, the yield of 10-year Japanese government bonds is still only about 0.9%, while the yield of U.S. government bonds is 4.6%, which gives investors a strong incentive to sell yen and buy dollars, so they can't invest in the United States.
The Bank of Japan is also continuing to purchase government bonds through the so-called quantitative easing policy, which is a step to inject cash into the financial system. The Federal Reserve has been reducing this scale. Brooks said that the easing policy effectively offset the impact of any support for the RMB.
He said: "The Bank of Japan should tighten policy by allowing the yield of 10-year Japanese government bonds to rise, and then (the Ministry of Finance) intervention will be more effective. This is what we lack."
Before joining the Brookings Institution, Brooks served as the chief economist of the Institute of International Finance and the chief foreign exchange strategist of Goldman Sachs. He won the game with Brazilian real in 2022, which caused a sensation in Brazil.
So far this year, the exchange rate of the yen against the dollar is the worst among developed countries, falling nearly 10%.
"This is entirely their own fault. They are unwilling to reduce their debt," he said. "Interestingly, it challenges the argument that developed economies have unlimited fiscal space."
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