Recently, the rapid depreciation of the yen has aroused widespread concern. On the morning of April 29, the Japanese yen even broke through the 160 mark against the US dollar. Although this transaction is likely to be an own dragon finger, it still caused great panic in the market, and the Japanese yen has a great potential to decline thousands of miles.
In order to save the endangered yen, the Japanese authorities may have rescued the market twice. According to the calculation of the Bank of Japan's account, the Bank of Japan may have spent 9 trillion yen, equivalent to 1.52% of Japan's nominal GDP in 2023. The degree of intervention is not small.
The interest rate meeting of the Federal Reserve in May became an unexpected joy. Although the policy interest rate remained unchanged, slowing down and shrinking the balance sheet was equivalent to substantial easing. The US dollar index corrected significantly, Asian currencies rose sharply, and the Japanese yen barely breathed a sigh of relief.
However, due to the heavy load, the yen is still easy to fall but difficult to rise. Under the temporary calm, there are great hidden worries.
one
The key to the continued depreciation of the yen lies in the widening interest margin between Japan and the United States.
If the current U.S. economy is in an atypical stage of high growth, high inflation and high interest rates, Japan can almost be said to be on the opposite side of the United States. In a word, it is Low growth, low inflation and low interest rate 。 While Powell was worried about suppressing high inflation, the governor of the Bank of Japan, Kazuo Ueda, was worried about the downward trend of domestic inflation.
In order to get rid of the country's deflation for more than 30 years, the Bank of Japan has successively implemented QQE (qualitative quantitative easing) YYC (yield curve control), from quantity to price, has continuously increased monetary policy strength, even when Europe and the United States entered the interest rate range and the interest rate gap is growing, it still adheres to the loose policy. Until March this year, when the CPI and core CPI were higher than the policy target of 2% for 23 consecutive months, and the salary of Chun Dou rose by more than 5%, the Bank of Japan announced the end of YCC policy, raised the benchmark interest rate from - 0.1%~0% to 0%~0.1%, and cancelled the purchase plan of Japanese stock ETF and REIT, but still planned to maintain the purchase scale of national bonds.
Although the overall rhythm has been tightened, the dovish attitude of the Bank of Japan still exceeded market expectations. The yen fell sharply in response to the good news, with a one-day decline of 1.14%. In the next two months, although the interest rate of 10Y Japanese bonds rose slightly, the rate of rise of 10Y US bonds was significantly faster, and the interest margin between Japan and the US was further expanded, with the maximum exceeding 380BP. Against this background, the market's expectation of the weakening of the yen continued to strengthen, the carry trade became more bullish, the short position of the yen increased rapidly, the yen entered the positive feedback depreciation channel of spiral decline, and became increasingly fierce after the Bank of Japan unexpectedly released the dove on April 28.
two
Japan's response to yen depreciation is very limited and passive.
For Japan, the fastest way to stabilize the yen exchange rate is for the Ministry of Finance to sell dollars to buy yen in the foreign exchange market. However, this has great limitations. If the intervention of the Ministry of Finance is not enough, it will not be able to reverse the market depreciation expectations, and the final achievements will be wasted. If the Ministry of Finance intervenes vigorously, it will consume precious liquidity, and then lead to more wanton attacks from international bears.
More importantly, the devaluation of the yen is the result of the spread between Japan and the United States. The reflexivity will lead to the process of self strengthening. The intervention of the Ministry of Finance is just to stop the boiling. In the short term, it may have some effect. The most radical short positions are repelled through the temporary amplification of volatility, but it is difficult to change the general trend of yen depreciation caused by carry trade in the medium and long term.
To narrow the interest rate gap between Japan and the United States, either the Bank of Japan will raise interest rates or the Federal Reserve will cut interest rates. Obviously, the Federal Reserve will not consider the interests of Japan. Its main concern is the US economy and inflation. For Japan, the only feasible way is for the Bank of Japan to regain its hawkish position and start a prudent and gradual interest rate increase process, but this will undoubtedly be a very difficult choice.
The Japanese government has a high leverage ratio, which makes it difficult to bear the rising cost of debt. According to the data of the Ministry of Finance, the stock of general treasury bonds will reach 1068 trillion yen in fiscal year 2023, of which the interest expenditure will be 8.5 trillion yen, accounting for 7.4% of the fiscal expenditure, and the average debt service interest rate (the ratio of interest expenditure to the outstanding balance) will be only 0.796%. Such a low debt cost obviously has much to do with the Bank of Japan's massive purchase of government bonds and implementation of YCC in the past. In this case, even if the interest rate rises slightly, it will become an unbearable burden for the Japanese government. Assuming that the average debt service rate rises to 2%, the interest expenditure alone will increase by 10.2 trillion yen. In contrast, Japan's military expenditure in 2023 will be no more than 10.16 trillion yen, an increase of 75% over 2022.
Japan's economy is still fragile, and a hasty tightening may lose all previous achievements. For the Bank of Japan, it is necessary to carefully consider the policy scale so that the hard to import and cost inflation can be converted into demand inflation in the future. The previous Chundou wage rose the most since 1991, greatly enhancing the Bank of Japan's confidence in realizing the wage inflation spiral. However, the accompanying inflation and employment data disappointed the Bank of Japan. In March, CPI and core CPI fell 0.1% and 0.2% month on month, while the unemployment rate further climbed to 2.7%. In addition, according to the data of 2023, private consumption and capital investment still pose a drag on growth. The economic growth is mainly supported by the increase in exports caused by the depreciation of the yen. All these indicate that there is still great uncertainty in Japan's economic recovery and inflation recovery. The transmission path of import prices upward to the inflation expectations of residents and enterprises has not been fully opened. The risk of economic recession and re deflation makes the Bank of Japan timid and dare not tighten suddenly.
three
The mainstream theories of exchange rate research mainly include purchasing power parity theory and interest rate parity theory. Among them, investors prefer the interest rate parity theory, mainly because it provides theoretical support for the carry trade and is more consistent with the reality of investment. The purchasing power parity theory is too idealistic and difficult to be verified in reality.
However, interest rate parity and interest rate have their own problems. This theory can only calculate the relative depreciation of the two countries' currencies, but cannot measure the absolute level of exchange rate depreciation. In theory, as long as the interest rate gap between the United States and Japan exists, the yen will continue to depreciate against the dollar, which is certainly impossible in reality. Because when the yen depreciates to a certain extent, the purchasing power parity will play a role. The rise in the performance price ratio of yen assets will attract foreign capital inflows, thus pushing the yen exchange rate toward an equilibrium level.
As a very developed capitalist country, Japan is unlikely to have a vicious situation of currency collapse devaluation like Thailand, Argentina, Zimbabwe and other countries. future, Large probability or small step and fast depreciation of yen At the critical juncture of 160, it may recover temporarily, and may squat down and jump when the expectation of the Federal Reserve's interest rate cut cools down.
The yen has indeed maintained this trend. As of May 9, the exchange rate of the yen against the US dollar had risen for four consecutive times and stood at the 155 level again. Previously, the intervention results of the Bank of Japan on May 2 had been completely consumed by the market. Even the threat of interest rate hikes issued by Bank of Japan President Yoshihiro Ueda on May 8 was ignored by the market, and the yen was still firmly depreciating downward.
Does the Bank of Japan really dare to raise interest rates? I'm afraid it's not possible. Ueda and Namo still want to raise interest rates to avoid the consensus expectation of yen depreciation in the market and the tragic situation of rapid decline at the end of April again. However, as we mentioned earlier, Japan's economic situation is too severe, which makes the threat of the Bank of Japan seem hollow and weak. The market is still enthusiastic about betting against the decline of the yen.
Recession or depreciation is really a good question for Japan.
[Note: The market is risky, so investment should be cautious. In any case, the information or opinions contained in this subscription number are only for exchange of views, and do not constitute investment suggestions for anyone. Except for special remarks, the research data in this paper is supported by Flush iFinD]
This article was originally written by "Xingtu Financial Research Institute", and the author is Wu Zewei, a researcher of Xingtu Financial Research Institute
