- 2024-07-20
- News
The Japanese yen has appreciated
On August 5th, Asian stock markets were shrouded in gloom, ushering in a "Black Monday."
Among the three East Asian countries, A-shares surprisingly performed the best, with all three major A-share indices closing with a decline of less than 2%. The hardest-hit ChiNext index fell by 1.9% compared to the previous trading day. The relatively independent market attributes saved A-shares from disaster.
China's other major capital market, the Hong Kong stock market, was not so fortunate, falling by more than 2%. However, compared to Japan and South Korea, both A-shares and Hong Kong stocks lived up to the term "safe haven."
After the close, the South Korean Composite Index fell by 8.77%, while the Nikkei Index fell even more severely, with a drop of more than 12% that was hard to believe for a country, or rather, Japan's stock index, the world's fourth-largest economy. In the words of stock traders, the Japanese market has hit its limit down.
Of course, the Japanese stock market does not have price limits, so theoretically, it cannot be described as "the market hitting its limit down." However, it is precisely the lack of restrictions that has allowed the Nikkei Index to plummet uncontrollably.
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On the other hand, the recent trend of the yen's exchange rate has been completely opposite to that of Japanese stocks.
After appreciating by 1.85% and 1.86% on July 31st and August 2nd, respectively, the yen appreciated even more on Monday, having already risen by 2.57%, breaking through the 143 mark. It is important to note that just a month ago, the yen had just set a historical low, depreciating to 161.96 against the US dollar. Interestingly, many Chinese people took advantage of the yen's depreciation to travel to Japan and take a big bite out of Japan's "cheap goods."
From 162 to 143 in a month, the appreciation rate exceeded 11%. Please note that this is the foreign exchange market, not the stock market. An appreciation or depreciation of 11% for a major world economy with political and economic stability is an extremely exaggerated occurrence.
Logically, currency appreciation should be beneficial to stock prices because stocks in the domestic market are priced in the local currency. An increase in the exchange rate means that even if the stock price remains unchanged, the value of the assets will increase, and funds will buy assets with relatively increased value to raise stock prices.
However, this logic has failed this time. While the yen's exchange rate is appreciating, Japanese stocks are accelerating their plunge into the abyss. What is going on? It may be related to two factors.Firstly, there are external factors: signs of a recession in the U.S. economy have emerged.
The Japanese economy is heavily reliant on exports. Recently, it has frequently experienced trade deficits due to the rise in the price of imported raw materials and lackluster exports, which is not a good situation for Japan.
Having barely returned to a trade surplus recently, the world's strongest consumer and largest buyer, the United States, has shown signs of recession. On August 2nd, the U.S. Department of Labor released labor force data for July, with the increase in non-farm employment significantly lower than market expectations, while the unemployment rate rose to 4.3%.
Employment data has always been seen as a forward-looking indicator of the U.S. economy. The slowdown in the labor market suggests that the U.S. may fall into stagflation, which is very bad news for Japan, which relies on exports.
At the same time, the Federal Reserve has sent a strong signal to lower interest rates, narrowing the interest rate differential between Japan and the U.S., causing the yen to appreciate. However, the appreciation of the domestic currency is not conducive to exports, as it increases the export costs for Japanese companies and weakens their competitiveness.
Affected by the dual adverse factors triggered by the United States, the market believes that the future of Japanese companies is worrisome, which is directly reflected in stock prices.
Secondly, there are internal reasons: the Bank of Japan chose to protect the exchange rate and suddenly raised interest rates.
As mentioned earlier, the yen has appreciated significantly in the past month. The reason is that Japan has changed its long-term monetary policy and started to raise interest rates.
Before March of this year, Japan's policy interest rate was negative. That's right, it was not even zero, it was negative. In March, the Bank of Japan raised interest rates for the first time in 17 years, finally turning the policy interest rate into a positive number. It was originally thought that after a significant adjustment, the Bank of Japan would take a break, but it turned out that there was more to come, far beyond daily expectations.
On July 31st, Japan held a monetary policy meeting and decided to raise interest rates again, increasing the policy interest rate from 0.1% to 0.25%. In addition, the head of the Bank of Japan hinted at another interest rate hike in the fourth quarter of Japan at a press conference, stating, "0.5% is not the end of the interest rate," which means that Japan may have multiple rounds of interest rate hikes.It is widely acknowledged that raising interest rates is detrimental to a country's economy and businesses. Japan has long maintained low interest rates, only daring to lower them and not daring to raise them, precisely because it fears that rates that are too high will harm the economy.
However, not long ago, the yen depreciated to above 160, putting Japan in a dilemma. Japan even used a significant amount of foreign exchange reserves to curb the yen's depreciation, but the effect was poor. The foreign reserves invested in the foreign exchange market did not play a substantial role, and the money was spent in vain.
Depreciation of the local currency is indeed beneficial to exports, but it can also lead to capital flight, which Japan cannot afford to withstand a severe financial blow. Faced with a dilemma, Japan decided to prioritize the exchange rate, which led to two interest rate hikes in four months, especially the latter one, which was completely beyond market expectations.
In the three trading days after the interest rate hike of 0.15%, the Nikkei index fell by 2.49%, 5.81%, and 12.4% respectively. After the close on August 5, the index stood at 31,458.42 points, which has erased 25.8% compared to the historical high on July 11.
Raising interest rates suppresses economic development, and the stock market is a barometer of the economy, reacting first and fastest. The Bank of Japan is not unaware of this principle, but it had to choose the lesser of two evils between protecting the exchange rate and protecting stocks. After all, the Japanese stock market has been in a bull market since last March, with the Nikkei index reaching a historical high, providing a certain basis for a decline.
However, unexpectedly, the "emergency" in the United States, coupled with the tense situation in the Middle East due to the assassination of Hamas leaders, led to a massive sell-off in the Japanese stock market due to the resonance of multiple factors.
I believe this was unforeseen by the Japanese government and the central bank. They originally intended to sacrifice some of the previous stock market gains and use interest rate hikes to stabilize the yen exchange rate. The result was that the cost paid far exceeded expectations, and the Nikkei index's gains from more than a year of bull market may have vanished in just a few days.
It is unclear whether Japan regrets it now, but what is certain is that there is no regret medicine in the world. Since it is necessary to protect the exchange rate, one can only go all the way to the end. The most feared is indecision, and suddenly changing direction halfway through policy implementation. History tells us that doing so often leads to getting nothing.
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