Since March 2022, the depreciation of the Japanese yen has attracted widespread attention. Wind data shows that the USD/JPY exchange rate depreciated from 114.92 in early March to 129.81 at the end of April, with a depreciation rate of 12.89%, far exceeding the decline of other Asian currencies in the same period (see Figure 1) [:2]. Since May, the U.S. dollar-yen exchange rate has generally remained stable, but remains at a 20-year low. The rapid depreciation of the yen has raised concerns about a possible currency war in Asia. Markets have been speculating on when the Bank of Japan would intervene in the yen. However, Japanese officials are divided on their stance on the yen. Although Bank of Japan Governor Haruhiko Kuroda acknowledged the negative impact of the rapid depreciation of the yen, he still insisted that the depreciation of the yen was generally beneficial to the Japanese economy. Japanese Finance Minister Shunichi Suzuki believes that the weak yen has a strong negative impact on the Japanese economy. "There are favorable factors for a weak yen, but in the current situation of soaring global crude oil and raw material costs, the negative factors are greater. A weak yen pushes up import prices, causing an impact that cannot be passed on to consumers and businesses." Why Japanese officials have different attitudes towards the depreciation of the yen? Will the yen continue to depreciate in the future? This is the question this article aims to answer. [2: Unless otherwise stated, the following data are from Wind. ]
1. Analysis of the reasons for the depreciation of the Japanese yen
(1) The interest rate gap between the United States and Japan continues to expand
The fundamental factor for the depreciation of the yen is the continued widening of the interest rate differential between the United States and Japan, which is mainly caused by the mismatch between the monetary policies of the United States and Japan. After the outbreak of COVID-19, the United States has the strongest economic recovery among developed economies, followed by Europe and Japan. In 2021, the nominal GDP of the United States and Europe has exceeded the pre-epidemic level, but Japan has not yet returned to the pre-epidemic level (see Table 1). After the outbreak of the Russia-Ukraine conflict, as import costs and inflation continued to rise, the real income of Japanese households and corporate profits declined, further increasing the downward pressure on the Japanese economy. Therefore, the Bank of Japan has to continue to maintain loose monetary policy to support economic recovery. In the United States, an ongoing economic recovery coupled with record high inflation levels has forced the Federal Reserve to continue tightening monetary policy. After the May interest rate meeting, the Federal Reserve announced a 50 basis point interest rate hike and began to shrink its balance sheet. The monetary policy mismatch between the central banks of the United States and Japan has intensified, causing the interest rate gap between the United States and Japan to continue to widen. The difference between the 10-year Treasury bond yields in the United States and Japan widened from 153bp in early March 2022 to 263bp at the end of April. The widening of interest rate differentials has caused the Japanese yen exchange rate to continue to fall (see Figure 2).
(2) Increase in arbitrage transactions
For a long time, the Japanese yen has been recognized as a safe haven currency for three main reasons: First, the Japanese economy has been in a state of low inflation and low interest rates for a long time; Second, the Japanese yen has high liquidity in the foreign exchange market; Third, the Japanese yen exchange rate is relatively stable . This has made the Japanese yen gradually become the main currency for investors to carry out carry trades since the 1990s. Investors borrow Japanese yen and invest in other high-interest currency assets around the world, including emerging markets, for arbitrage purposes. Whenever a natural disaster, war, economic or financial crisis occurs, the Japanese yen arbitrage trade will be closed due to a sharp increase in risk aversion, resulting in varying degrees of appreciation of the Japanese yen. This is an important reason why the Japanese yen has safe-haven properties. reason. However, since the beginning of the year, arbitrage trading has not only failed to become a factor in boosting the yen, but has accelerated the decline of the yen. Mainly because in the past, carry trades mainly involved investing in emerging market assets to earn interest rate differentials. However, as the Federal Reserve continues to tighten and U.S. bond yields continue to rise, the value of investment has become increasingly prominent. More and more investors are borrowing Japanese yen to invest. The increase in U.S. debt caused the Japanese yen to fall further.
(3) Decline in net exports
Since 2022, due to continued supply chain tensions and rising energy prices, import prices have continued to rise and import amounts have continued to increase. Japan's import volume continues to rise, from 6.15 trillion yen in January 2021 to 8.87 trillion yen in March 2022, with the import volume reaching a record high. Benefiting from the global economic recovery, Japan's export value has also increased, but it is far lower than the growth rate of import value, and the current account balance has also continued to deteriorate. The current account balance dropped sharply from -267.5 billion yen in December 2021 to -1,196.4 billion yen in January 2022, the lowest level in the past eight years. Among them, the balance of goods and services under the current account was -2,342.2 billion yen, which was also the lowest level in the past eight years. Although the current account balance of goods and services rebounded to -380.3 billion yen and -293.8 billion yen respectively in February and March 2022, it is still in deficit.
2. The depreciation of the yen has both advantages and disadvantages for the Japanese economy
(1) Gains from the depreciation of the Japanese yen
1. Increase exports
In the 1990s, the Japanese economy experienced a "lost decade". In addition, Japan's population is aging and its economy has long faced the problem of insufficient domestic demand. Therefore, exports have become increasingly important to the Japanese economy and have gradually become an important tool for the Japanese government to boost the economy. In this context, the Japanese government began to intentionally guide the depreciation of the yen to promote exports. After Abe came to power in 2012, he launched “Abenomics”. The core of his policy is to rely on loose monetary policy to activate the domestic economy and increase exports through large-scale monetary easing to promote exchange rate depreciation. The initial implementation of Abenomics has achieved good results. Driven by the depreciation of the yen, Japan's export trend has improved significantly. Since March 2013, export growth has continued to accelerate. In the second half of 2013, the average monthly export growth rate (seasonally adjusted) was as high as 14.66% year-on-year. The rapid growth of exports has had a significant stimulating effect on the Japanese economy. In the third quarter of 2013, Japan’s economic growth rate was as high as 3%. Economic growth continued to rebound to 3.1% in the fourth quarter, the highest level since 2011. Therefore, the Japanese government has long been committed to guiding the depreciation of the yen to stimulate the economy by promoting exports. In this process, the Bank of Japan played an important role in suppressing the Japanese yen exchange rate through various means such as monetary policy easing and expectation management.
2. Increase in initial income
Although the Japanese economy has been in a long-term downturn since the 1990s, it is still a world economic power. The important reason is that Japan has huge overseas assets. As of the end of 2020, Japan's overseas assets reached 716 trillion yen. Earnings generated from overseas assets (i.e., "primary income") continue to flow back, making an important contribution to stabilizing the Japanese economy. After the global financial crisis, Japan's current account trade in goods and services was in deficit for most of the time. The reason why its current account was able to maintain a surplus was mainly because of its large "primary income" surplus (see Figure 3). In 2021, Japan's current account surplus will be 15.49 trillion yen, of which the primary income surplus will be 20.48 trillion yen. In other words, without the contribution of primary income, Japan's current account would be in deficit. Because overseas income is so large, the Japanese yen exchange rate has a great impact on investment income. If the yen appreciates, the yen-denominated profits of overseas Japanese companies will decrease, which will be detrimental to Japan's domestic investment and consumption, and the Japanese economy will also face pressure. If the yen depreciates, the yen-denominated earnings of overseas Japanese companies will increase, which will promote domestic investment and consumption in Japan, thereby stimulating economic growth. Therefore, in recent years, the Bank of Japan has been increasingly inclined to pursue a weak yen policy and guide the depreciation of the yen through various means to maximize "primary income" denominated in yen.
(2) Adverse effects of the depreciation of the yen
1. Export-stimulating effect weakens
For a long time in the past, Japan was happy to see the yen depreciate. As an export-oriented economy, a weaker yen can increase exports. However, after the global financial crisis, especially after the outbreak of the new coronavirus epidemic, the stimulating effect of the depreciation of the yen on exports continued to decline. From January 2021 to March 2022, the yen depreciated by as much as 16.2%, while exports increased by only 12.9% during the same period. There are three main reasons why the depreciation of the yen has less of a stimulating effect on exports: First, the global industrial chain is getting longer and longer. Japan's exports require large amounts of imported raw materials and intermediate products. The depreciation of the yen increases the import price of raw materials and intermediate products, pushing up production costs, which in turn leads to an increase in the price of goods denominated in yen. Second, global trade growth has slowed. From 2001 to 2010, the average year-on-year growth rate of global trade in goods and services was 9.9%, but by 2011-2020 it was only 2.1%. It dropped to -1.49% and -9.89% in 2019 and 2020 respectively. Third, the depreciation of the yen may trigger competitive depreciation in Asia. For example, during the implementation of Abenomics from 2012 to 2014, the Japanese yen depreciated by as much as 56%, while other Asian currencies also fell sharply during the same period, including the Indonesian rupiah depreciating by 36% and the Indian rupee by 50%. 19%, and the Malaysian ringgit fell 20%. 11%. Therefore, the depreciation of the yen will not necessarily promote an increase in exports and thereby boost the Japanese economy.
2. Rising import costs lead to increased operating pressure on enterprises
Japan is resource-poor and relies heavily on commodity imports, especially oil and natural gas. From the second half of 2020 to the first half of 2021, the CRB spot index rose sharply from 362.83 to 578.31, an increase of as much as 59%. Since 2022, commodity prices have risen again. From January to April, the CRB spot index rose 11%. Coupled with the depreciation of the yen, Japan's import costs have increased significantly. As commodity prices rise, corporate production costs increase significantly, and the transmission to downstream is not smooth. In April 2022, Japan's import price index increased by 44.6% year-on-year, while its export price index increased by only 17.3% year-on-year. Therefore, although the depreciation of the yen can increase exporters' profits, a large part of it is offset by rising costs. Since the second half of 2021, Japan has been in a trade deficit, further reflecting the cost pressures caused by energy and commodities on Japanese companies. In January 2022, Japan's current account deficit of goods and services reached 2.34 trillion yen, the second highest record in history. Not only that, the sharp depreciation of the yen and the rise in electricity prices caused by the soaring prices of natural gas and coal have also become one of the heavy burdens facing the Japanese economy. Electricity is the blood of industry, and rising electricity prices have further increased the operating pressure on enterprises.
3. May have a negative impact on the international balance of payments
Theoretically, the impact of the depreciation of the yen on the current account is complex. This will lead not only to an increase in exports but also to an increase in imports and primary income from overseas. From the perspective of its impact on capital projects, the depreciation of the yen may trigger capital outflows and increase the pressure for depreciation of the yen. If investors are pessimistic about the outlook for the yen, capital outflows will continue, exacerbating the depreciation of the yen and forming a vicious cycle. From the data point of view, in terms of current account, the trade deficit in goods and services in the first quarter of 2022 was 3,016.3 billion yen, while the deficit in the fourth quarter of 2021 was 1,713.7 billion yen, and the trade surplus in goods and services in the fourth quarter of 2021 was 17,137 yen. billion yen. In the first quarter of 2021, it was 869 billion yen, showing that as Japan’s renminbi continues to depreciate, the deficit continues to expand (see Figure 4). The widening trade deficit in goods and services has led to a current account deficit. In January 2022, the current account deficit was 1,196.4 billion yen, the highest level since February 2014. In terms of capital and financial accounts, errors and omissions were -636.3 billion yen and -993.9 billion yen respectively in February and March 2022, indicating that hidden capital outflows are increasing. In terms of foreign exchange reserves, Japan's official reserve assets continued to decline, from US$1.42 trillion in August 2021 to US$1.32 trillion in April 2022. Especially from January to April this year, the decline was obvious, with the scale falling by as much as 83.557 billion US dollars. The above situation shows that the negative impact of the depreciation of the yen on the international balance of payments continues to appear.
3. The Japanese yen still faces certain depreciation pressure.
(1) The Bank of Japan will continue its easing policy
At present, Japan's economic recovery is still weak. Japan's private consumption accounts for more than 50% of GDP. Affected by factors such as rising prices and economic weakness, Japanese consumption continues to decline. In March 2022, Japan's commercial sales growth rate was 5.2% year-on-year, significantly lower than the 6.9% growth rate in January. The actual year-on-year growth rate of monthly consumer spending for households with two or more people also dropped from 6.9% in January to -2.3% in March. Japanese consumer confidence has also continued to decline since the end of last year, falling from 39.2 in November 2021 to 32 in April 2022. The continued rise in commodity prices has pushed up import prices, which has not only increased the operating pressure on Japanese companies, but also led to the continued expansion of Japan's trade deficit, which has also had an adverse impact on economic growth. In the first quarter of 2022, Japan's current account deficit for goods and services was -3.02 trillion yen, compared with 869 billion yen in the same period last year. In addition, the depreciation of the yen has also led to further increase in imported inflationary pressure, and Japan's economic recovery is facing increasing challenges. Given that the current prospects for Japan's economic recovery are still poor, the Bank of Japan will continue to maintain loose policies to support economic recovery, which will also put greater pressure on the Japanese yen.
(2) The international balance of payments is still under pressure
Judging from the trend, Japan’s international balance of payments situation is not optimistic. First, it is difficult for international commodity prices to fall back. Currently, the conflict between Russia and Ukraine is still ongoing, the global epidemic situation remains severe, and the supply of bulk commodities such as energy and food still faces many constraints, making the mismatch between supply and demand difficult to resolve in the short term. Even if international commodity prices fall in the future, the extent is expected to be relatively limited. High international commodity prices will, on the one hand, keep Japan's import volume at a high level and make it difficult to reduce the current account trade deficit in goods and services. On the other hand, Japanese companies will face greater operating pressure and the prospects for economic recovery will deteriorate. The Bank of Japan will also have to continue to maintain its loose policy, increasing pressure on the yen to depreciate. Second, international capital outflows may increase. Recently, the Japanese yen is expected to depreciate due to the worsening mismatch in monetary policies between the United States and Japan. In this case, international capital outflow pressure will increase and foreign exchange reserves will continue to decline. Additionally, yen carry trades may also increase. As interest rate differentials between the U.S. and Japan remain high, investors will continue to borrow Japanese yen to invest in U.S. bonds to obtain the spread income. All of this will lead to further pressure on the yen to depreciate.
(3) The Federal Reserve may further tighten monetary policy rapidly
After the May 2022 interest rate meeting, the Federal Reserve raised interest rates again by 50bp. At the same time, it announced that it would begin reducing its balance sheet in June. The monthly balance sheet shrinkage is capped at $47.5 billion, rising to $95 billion in three months. Federal Reserve Chairman Powell recently said that interest rates may be raised by 50bp in June and July respectively. CME Group data on May 17 showed that the market expects a 49.9% probability that the U.S. federal interest rate will be between 275-300bp, indicating that the market’s expectations for the Federal Reserve to raise interest rates have increased significantly since the beginning of the year. There are two main reasons why the Federal Reserve continues to raise interest rates: first, the U.S. economy continues to recover and the labor market remains strong; second, the U.S. economy continues to recover and the labor market remains strong. Secondly, U.S. inflation has hit record highs repeatedly, with the U.S. inflation rate hitting a 40-year high. The Federal Reserve believes that household consumption and business investment remain strong, and the fundamentals of the U.S. economy support the Federal Reserve to continue to rapidly raise interest rates to curb inflation. Considering that the U.S. economic recovery will continue for some time and that the conflicts in Russia and Ukraine have further increased inflationary pressure in the U.S., the Federal Reserve may continue to raise interest rates rapidly to lower inflation as soon as possible. Once the Federal Reserve continues to tighten and the Bank of Japan remains loose, the degree of monetary policy mismatch will increase again, and the interest rate gap between the United States and Japan will continue to expand, thereby increasing the pressure on the yen to depreciate.
Keyword reading: Japanese yen
标签： #Exchange rate depreciation #Yen USD #Fed rate hike #Foreign exchange #Current account
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