• 2024-09-29
• News

Yen Dives Below 158 Mark, Depreciation Accelerates

The Japanese yen has depreciated again and again and again!

On April 26th, the Japanese yen's exchange rate against the US dollar depreciated by 1.73%, and it now requires 158.35 yen to exchange for 1 US dollar, which is more than a 50% cumulative depreciation compared to over three years ago.

In 2022, the yen experienced a rapid depreciation, with the yen-to-US dollar exchange rate breaking through the 150 mark, shocking the world, as it was big news at the time. Unexpectedly, the 150 back then was just the starting point for now, and the yen is getting further and further on the road of depreciation.

Although Japan does not have foreign exchange controls, the Bank of Japan is not completely laissez-faire about foreign exchange freedom. In fact, no country dares to claim that it never intervenes in the foreign exchange market. Currency is a symbol of a country's sovereign credit. Not to mention other things, it is also hard to face long-term substantial depreciation.

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Two years ago, when the Bank of Japan saw the yen breaking through 150, it immediately took action and adopted a series of measures to support the yen's exchange rate. After that, the yen appreciated for three consecutive months, directly rising from 151.94 to 130.1, and the yen exchange rate temporarily stabilized.

However, this time, the Bank of Japan is indifferent to the depreciation of the yen and even "adds fuel to the fire," causing the yen to experience a huge single-day depreciation on April 26th.

On April 26th, local time, the Bank of Japan held an interest rate meeting and decided to keep the interest rate unchanged. At the previous interest rate meeting, the newly appointed Bank of Japan governor personally ended the negative interest rate era that lasted for 8 years, raising the policy interest rate to 0-0.1%. However, even with the rate hike, it still failed to stop the depreciation trend of the yen.

As a result, the market was full of expectations for Japan to raise interest rates again after this meeting, but the actual result broke expectations. Japan did not raise interest rates, and the 0.1% policy interest rate cap is far from the 5.5% in the United States, one is heaven, and the other is earth.

In addition, the Bank of Japan also removed the wording of purchasing 60,000 yen worth of government bonds per month in the statement. The speculation that the central bank wants to "abandon" Japanese bonds further put pressure on the yen exchange rate and Japanese bond prices.

Why is the Bank of Japan willing to watch the yen continue to depreciate abnormally and remain indifferent? It's not that Japan doesn't want to intervene, but it can't act, for three reasons.Firstly, raising interest rates would further weaken the already fragile Japanese economy. In 2023, Japan's nominal GDP, affected by the depreciation of the yen, fell below Germany's, dropping from the third to the fourth largest economy in the world. At the same time, Japan finally saw signs of emerging from 30 years of deflation. Raising interest rates again rashly after having already done so once would have an adverse effect on the Japanese economy. The Bank of Japan forecasts a GDP growth rate of 0.8% for the fiscal year 2024, which is one-third lower than the 1.2% predicted on January 1st. Raising interest rates would further suppress economic expansion, so the Bank of Japan does not have the confidence to continuously raise interest rates.

Secondly, the depreciation of the yen is beneficial for exports. Last week, the Ministry of Finance of Japan announced the foreign trade data for the fiscal year 2023. From April 2023 to March 2024, Japan's import and export trade deficit was 5.89 trillion yen, marking the third consecutive year of trade deficit. Japan is a typical export-oriented economy, and continuous trade deficits are highly abnormal. However, the depreciation of the local currency is beneficial for exports. Perhaps to narrow the trade deficit, Japan has allowed the exchange rate to depreciate without intervention, hoping to stimulate exports. In March, Japan's export volume increased year-on-year, while the import volume decreased, achieving a trade surplus of 366.5 billion yen, demonstrating that currency depreciation has indeed played a role in boosting exports.

Thirdly, the key to the direction of the yen's exchange rate is not in the Bank of Japan but in the Federal Reserve. Let's assume that the Bank of Japan raises interest rates twice in a row, and Japan's policy interest rate changes from a negative rate to 0.2%. What if we add a few more times, making it 0.5% or even 1%? In the short term, the yen will definitely appreciate, but after a while, it may not be the case, because whether it's 0.2%, 0.5%, or 1%, it is far from the 5.5% interest rate in the United States, and the interest rate differential is still significant. No matter how much the Bank of Japan raises interest rates, it cannot reach the level of the United States, to be precise, it cannot even get close. For investors, it is not significant and they would still choose to hold US dollars. So, in a sense, the decision-making power over the yen's exchange rate is not in the hands of the Bank of Japan, but in the Federal Reserve. When the latter starts to lower interest rates, the value of the yen will be reflected.

People may only notice that the current interest rate in the United States is between 5.25% and 5.5%, but don't forget that it was only 0-0.25% two years ago, not much higher than Japan's. At that time, the interest rate differential was very small, and there was no motivation or profit for the most bearish yen funds, unlike now, where the arbitrage space is so large.Therefore, even if the Bank of Japan "tries hard," it may not be able to play a significant role; whether the Federal Reserve lowers interest rates or not is the key. It's like a giant over 2 meters tall competing with someone under 1.3 meters in a high-jump contest; the latter, no matter how hard they jump, cannot reach the height the former can touch. To win, they can only hope that the tall person voluntarily bends down.

The three main reasons why the Bank of Japan remains indifferent to the sharp depreciation of the yen are: lack of economic confidence, the need to protect exports, and the ineffectiveness of measures taken. In the past, Japan would still "verbally" intervene, even if there were no actual actions, to make some tough statements to stabilize the exchange rate. Now, even this step has been omitted, completely "lying flat" and letting the market decide the future of the yen's exchange rate. This is a hardship for those living overseas whose main income comes from Japan.

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