Since March this year, the yen has experienced a 16-day losing streak, the longest losing streak in 50 years. The Japanese yen has fallen more than 11% against the dollar, and once fell to 130 yen per dollar, a 20-year low. The exchange rate of the yen against other currencies also continued to fall, and the RMB against the yen once exceeded the 20 mark. Among the world’s major currencies, the yen is the weakest performer, falling behind the Russian ruble since the beginning of the year. The yen has quickly changed from a safe-haven currency to an asset that is being sold and shorted in the market, arousing great concern from all parties. The head of the International Monetary Fund (IMF) said that the sharp depreciation of the yen may lead to shrinking domestic demand in Japan and a deterioration of the trading environment.
Multiple factors lead to this round of depreciation
This round of sharp depreciation of the yen is an acceleration since it entered the depreciation channel in March last year. There are not only direct incentives such as the Fed raising interest rates, but also multiple factors such as Japan’s balance of payments imbalance and its own economic structural problems.
First, Japan’s monetary policy is at odds with major countries in the world. With global inflation intensifying and major central banks such as the Federal Reserve and the European Central Bank entering the channel of interest rate hikes, the Bank of Japan, forced by the sluggish domestic economic recovery, still adheres to the ultra-loose policy, implements fixed-rate purchases, and purchases government bonds without restrictions to control interest rates. As a result, the interest rate gap between the yen and the currencies of major countries in the world has been widening. Buying dollars and selling yen in the foreign exchange market has become the mainstream, directly driving down the yen exchange rate.
The second is the imbalance of international payments. Since the epidemic, Japan’s exports of goods and services have been sluggish, and international tourism revenue has dropped sharply; the dependence on foreign energy and food is very high (as high as 88% and 63%, respectively). With global inflation in the second half of 2021, energy and food prices will be high, and Japan’s foreign trade The deficit has been running for eight consecutive months since August last year, and the current account balance has shrunk for four consecutive years. The market is generally worried about Japan’s current account deficit this year, and the yen exchange rate is therefore under pressure.
The third is the constraints of economic structural problems. Japan’s industrial control is relatively strict, the digitalization process is lagging behind, domestic investment is insufficient, and the industrial structure upgrade is slow. The outflow of manufacturing has accelerated the hollowing out of industries, and the number of competitive high-value-added industries has been decreasing. The reduction of the total population and the aging of the population structure have resulted in a long-term slump in private consumption in Japan, reduced market confidence, weakened capital viscosity, and led to capital outflows. The above-mentioned structural problems in the Japanese economy have hit Japan’s competitiveness and become a long-term factor that induces the depreciation of the yen.
Devaluation does more harm than good
Although the devaluation of the yen helps to increase the competitiveness of Japan’s main export products such as automobiles and consumer electronics products and benefits the stock market, it is regarded as a “gospel” for revitalizing the Japanese economy, but the depreciation of the Japanese economy as a whole does more harm than good, and it is changing The “negative equity” of the Japanese economy.
First, the pressure on enterprises and people’s livelihood is rising. Affected by the depreciation of the yen and the sharp rise in international commodity prices, Japan’s corporate price index has risen year-on-year for 13 consecutive months. In March this year, the yen-denominated import price index rose by 33.4% year-on-year. More than 3/4 of Japanese companies said that the current yen exchange rate has fallen to the extent that the interests of the companies are damaged. Japan’s domestic food and other food products rose by 2% to 5%, essential consumer goods rose by 3%, and electricity and gas rose by 16% to 19%. The sharp increase in people’s living pressure further lowered their willingness to consume.
Second, the boosting effect of exports has weakened. Affected by the relocation of Japanese companies overseas, the export promotion effect of the depreciation of the yen has gradually weakened. Daiwa Securities estimates that for every 1 yen depreciation of the yen against the dollar in 2009, the current account surplus of Japanese companies can increase by 1%, compared to only 0.4% at present.
The third is to increase the risk of the financial system. The continued depreciation of the yen has led to intensified capital outflows from Japan, increasing the downward pressure on the Japanese stock market, affecting the stability of the Japanese financial market and exacerbating the volatility of the global foreign exchange market. In addition, due to the continuous depreciation of the yen, a considerable proportion of large overseas asset management institutions have sharply reduced their positions in yen in their safe-haven investment portfolios, and some investment institutions have replaced their positions in yen by increasing their positions in RMB, which weakened the safe-haven nature of the yen.
The Japanese government is in a dilemma
Compared with other major economies, Japan’s economic recovery lacks momentum. After the Japanese economy shrank for two consecutive years in 2019 and 2020, it will turn to slow growth in 2021. The actual gross domestic product (GDP) growth is only 1.6%. It is expected that the average GDP growth rate in the three years from 2020 to 2022 will still be negative. The bleak prospects for economic recovery and the fact that the Federal Reserve has entered a channel to raise interest rates and other factors, the Japanese government is caught in the dilemma of “neither raising interest rates nor cutting interest rates”, and the means and space for regulation are quite limited.
Japanese Finance Minister Shunichi Suzuki publicly called this round of yen depreciation a “vicious devaluation”. Chief Cabinet Secretary Hiroichi Matsuno has repeatedly expressed that he does not want a drastic change in the exchange rate and will pay close attention to market trends. However, in the context of the yen’s depreciation to a historical low, the Bank of Japan held a financial policy meeting on April 28 and decided to continue to maintain a large-scale loose monetary policy, buying unlimited government bonds at a fixed exchange rate every day to curb the upward pressure on long-term interest rates. It can be seen that the current policy focus of the Japanese government is still to promote recovery rather than stabilizing the exchange rate. Although the Japanese government is concerned about the negative impact of the rapid depreciation of the yen, it can only stay on “verbal intervention”.
According to media reports, Japanese policymakers have said that the Japanese government will only choose to intervene in the exchange rate when it faces a “triple sell-off” in the currency, stock and bond markets, causing a sharp capital outflow. The market predicts that with the Fed insisting on tightening and international commodity prices continue to rise, the yen exchange rate will continue to weaken, and may fall below 140 to 150 yen against the US dollar by the end of this year and early next year.
Spillover effects deserve attention
As the main currency in the region, the Japanese yen has a strong demonstration role and spillover effects. The three rounds of yen depreciation in 1997, 2012 and 2014 all led to a sharp depreciation of the currencies of many countries in the region. With this round of yen decline, major currencies in Asia have depreciated to varying degrees since March this year. The Korean won, Thai baht, Malaysian ringgit, Philippine peso, and Indian rupee depreciated against the US dollar by 3%, 3.3%, 2%, 2.1% and 2.1% respectively. 1%.
At present, the overall economic growth momentum of Asian economies is weakening, and economic and financial vulnerabilities are constantly emerging. Some people believe that in the context of the Fed’s accelerated withdrawal of loose monetary policy and the tightening of global currency markets, it is necessary to be alert to the devaluation of the yen, which will trigger an “Asian currency devaluation wave” and even trigger a new round of Asian financial crisis.