- 2024-09-08
- News
Yen Devaluation Crisis Escalates!
After the Japanese yen broke through the 160 psychological threshold against the US dollar, Japan could no longer remain indifferent. Previously, the new Bank of Japan (BOJ) governor's stance was ambiguous, leading to speculation that he might not intervene. However, this attitude was interpreted by the market as "the BOJ allowing the currency to depreciate," especially after Japan refrained from raising interest rates at the latest monetary policy meeting. This emboldened the bears, who profited from short-selling, causing the yen to break through the 160 level.
Seeing the situation spiraling out of control, the BOJ quietly intervened. On April 29th, the day the yen broke through 160, it might have been their first intervention, implementing a scale of 5.5 trillion yen. The yen's exchange rate turned from depreciation to appreciation that day, returning below 160.
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On May 2nd and May 3rd, Japan is suspected of intervening again. The intervention scale on May 2nd might have been around 3.5 trillion yen, while the data for May 3rd is unknown. However, it is certain that the total amount of the last three interventions is likely to exceed 10 trillion yen, surpassing the 9.2 trillion yen intervention scale in September and October 2022.
The new BOJ governor, Kazuo Ueda, has had bad luck. He encountered a strong US dollar shortly after taking office. The Federal Reserve's continuous delay in lowering interest rates and expanding the balance sheet put pressure on the yen's exchange rate. Although Ueda changed the extremely loose monetary policy of his predecessor, he still could not stabilize the yen's exchange rate through the market itself.
Japan's intervention in the foreign exchange market comes at a cost. The specific method is to sell US dollars and buy yen. Currency is also a kind of commodity; when more people sell and fewer buy, the price falls, which means devaluation. Conversely, it appreciates. The BOJ selling US dollars and buying yen can boost the yen's exchange rate, but it consumes the country's foreign exchange reserves.
Foreign exchange reserves are crucial for a country, equivalent to savings. As an energy-dependent country, Japan needs to spend money to import a large amount of oil, raw materials, etc., from foreign countries, and its finances are not宽松. Therefore, there is not much US dollar foreign exchange reserves available for intervening in the exchange rate. Unless it is absolutely necessary, Japan will not sell US dollars to buy yen.
According to a research report by JPMorgan Chase, as of the end of March 2024, Japan's official foreign exchange reserves included $994 billion in "securities" and $155 billion in "deposits." Theoretically, these could be used to intervene in the foreign exchange market, but in practice, it is impossible to do so.
While Japan was trying its best to stabilize the yen's exchange rate, the United States was unhappy and directly stated that the BOJ's actions were meaningless.U.S. Treasury Secretary Janet Yellen has expressed her disapproval of Japan's intervention in the foreign exchange market. She believes that intervention should only occur in extremely rare circumstances and emphasizes that the United States hopes for such situations to be infrequent and for Japan to seek prior consultation.
This statement is quite nuanced, very much in line with Yellen's style of operation. Let me translate it for everyone.
Firstly, it is suggested that the Bank of Japan should not arbitrarily intervene in the exchange rate market, and only do so in extreme circumstances. As for what constitutes an extreme situation, refer to point two.
Secondly, before intervening, Japan should consult with the United States, or to put it more bluntly, report to them. This means that whether a situation is considered extreme largely depends on what the United States says.
Japan is quite frustrated. Let's not even talk about the military aspect, where they are not only restricted in development but also have U.S. military bases; politically, their status does not match their position as the third-largest economy, and their international voice is not significant; now it seems that their economic and financial autonomy is also limited. They want to intervene in their own currency's depreciation but must "consult" with the United States, get their approval before acting, otherwise, they will face public warnings from the United States as they did this time.
From a certain perspective, although Japan and the United States appear to be strategic allies, in reality, Japan is more like a younger brother to the latter, seeking the older brother's consent for major decisions. It is likely that they have endured a lot of frustration during their "work reports."
Take the recent depreciation as an example. The most important factor causing the sharp drop in the yen's exchange rate is the strong dollar cycle and the Federal Reserve's delay in lowering interest rates. The responsibility should be borne by the dollar. However, not only does the United States not feel embarrassed, but it also expresses dissatisfaction with Japan's self-help actions, allowing the yen's depreciation crisis to escalate. Do you think Japan feels comfortable? They just dare not say it directly due to their "younger brother" status, which is indeed quite miserable.
In this round of Asian currency depreciation, the yen is the first to be hit, while our renminbi has performed very differently, relatively speaking, it is very reliable. The main reasons for not depreciating significantly are related to two factors.
Firstly, China's economy has been stable and rising in the first quarter. In the first quarter of 2024, China's GDP increased by 5.3% year-on-year, once again becoming the leader among global mainstream economies and exceeding the annual target of 5%. The economic "good start" has filled the world with confidence in holding the renminbi.
Secondly, China has enough foreign exchange reserves. Intervening in the foreign exchange market requires the consumption of foreign exchange reserves. Speculators will decide which currency to short based on a country's foreign exchange reserve situation, and those with small reserves are more likely to be shorted. China's foreign exchange reserves stand at $3.2 trillion, ranking first in the world. In the event of a sharp exchange rate drop, they can turn the tide. The huge scale of foreign exchange reserves is like a nuclear bomb, which may not necessarily be used but must be possessed, serving as a strategic deterrent.
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