The continuous and rapid depreciation of the yen has made the Japanese government and the Bank of Japan, which had been “holding back” until now, unable to sit still. On the 21st local time, the Federal Reserve announced a sharp increase of 75 basis points in interest rates. On the 22nd, the exchange rate of the yen against the US dollar fell rapidly to the 145 range, forcing Japan to intervene in the foreign exchange market after a lapse of 24 years. Since the beginning of this year, the continued depreciation of the yen has made Japan’s gross domestic product (GDP) denominated in US dollars likely to fall below US$4 trillion for the first time in 30 years, causing Japan to lose its position as the world’s third-largest economy.
After a lapse of 24 years, Japan made a move on the foreign exchange market
According to the “Nihon Keizai Shimbun” report, the Japanese government and the Bank of Japan announced on the 22nd that they would intervene in the foreign exchange market by buying yen and selling dollars. This is the first time the Japanese government has intervened in the foreign exchange market since June 1998. Affected by this, the exchange rate of the yen against the US dollar strengthened, once rising to the 141 range.
Japanese Finance Minister Kanda Masato told the media that day: “Excessive and disorderly fluctuations in the exchange rate cannot be tolerated.” Japanese Finance Minister Suzuki Shunichi previously told the media that the Japanese government is highly concerned about foreign exchange market trends, and if the trend of yen depreciation continues Going forward, we will not rule out any option to take necessary countermeasures in the foreign exchange market. The last time Japan intervened to sell dollars to buy yen was in June 1998 at the height of the Asian currency crisis, and the last time it entered the market to sell yen was in November 2011.
Earlier, the Bank of Japan announced at the end of the day’s monetary policy meeting that it would keep the policy rate unchanged at -0.1% and maintain the 10-year Japanese government bond yield target at around 0%. Japan is currently the last major economy with a central bank still in negative interest rate territory.
As the Federal Reserve has just announced a sharp 75 basis point interest rate hike, the market’s expectations for the continued widening of the monetary policy difference between Japan and the United States and the further widening of the interest rate gap between the Japanese yen and the US dollar have strengthened. After the Bank of Japan released the news, the yen exchange rate in the Tokyo foreign exchange market once fell to 145 yen per dollar, a new low in 24 years.
Bank of Japan Governor Haruhiko Kuroda told a news conference after the monetary policy meeting that Japan’s financial policy does not target the exchange rate and stressed that the Bank of Japan will not raise the exchange rate. Regarding the current negative interest rate policy in Japan, Kuroda Haruhiko believes that it will not cause major side effects or problems.
In the face of the rapid depreciation of the yen, Kuroda said: “There are many factors that affect the exchange rate. The reasons for the depreciation of the yen are both unilateral and speculative. The continuous depreciation of the yen makes it difficult for companies to formulate long-term development. Planning has also increased the uncertainty of the economic outlook, which is negative for the Japanese economy.” Kuroda also believes that it is necessary to pay full attention to the impact of financial and foreign exchange market trends on the Japanese economy and prices.
“Third in the world” hangs
Affected by the continued depreciation of the yen, Japan’s total GDP in US dollars has fallen back to 30 years ago. A few days ago, the “Nihon Keizai Shimbun” quoted the forecast of the Organization for Economic Cooperation and Development (OECD) as saying that Japan’s nominal GDP this year is expected to be 553 trillion yen, or 3.9 trillion US dollars in US dollars. roughly equivalent. Japan’s economy may fall below $4 trillion for the first time since 1992. If the yen continues to depreciate or hover at a low level, Japan’s GDP will remain below $4 trillion next year.
For 42 years from 1968 to 2009, Japan had been the second largest country in the world in terms of GDP, after the United States. In 2010, China’s total GDP surpassed that of Japan, and Japan has maintained its third position in the world for the next 12 years.
Japanese economic analyst Ken Toba believes that at present, Japan’s third position in GDP is in jeopardy. Judging from the global GDP ranking in 2021, the economic size gap between Japan and Germany, which ranks third, is only 17%.
Ken Toba predicted that the European Central Bank will continue to raise interest rates in the second half of 2022, while the Bank of Japan has maintained an accommodative monetary policy. Under such circumstances, the depreciation of the yen and the appreciation of the euro will continue in the future. If the depreciation of the yen exceeds the key point of 1 euro to 150 yen, Japan’s GDP will fall to the fourth place in the world. It will become a reality. At present, Germany’s total population is about 83.88 million, and Japan’s total population is about 125.58 million. If you compare the per capita GDP, Germany is nearly 15,000 US dollars higher than Japan’s.
According to the August trade statistics released by the Japanese Ministry of Finance on September 15, due to high energy prices and the depreciation of the yen, Japan’s trade deficit in August was 2,817.3 billion yen, the largest monthly deficit in history since 1979. This is the 13th consecutive month that Japan’s international trade balance has been in deficit.
The report shows that due to the soaring international energy prices and the depreciation of the yen, especially the significant increase in the import value of coal, liquefied natural gas, crude oil and other energy sources, the import value of Japan in the month increased by 49.9% year-on-year to 10.88 trillion yen, surpassing the previous year for 19 consecutive months. During the same period, it reached a record high.
At the same time, exchange rate fluctuations also bring another major hidden danger to the Japanese economy. According to a report by “AsiaNews Network” on the 21st, with the “boots landing” of the Fed raising interest rates, the huge funds held by Japanese households are at risk of flowing overseas. The report quoted Bank of America’s chief foreign exchange and interest rate strategist in Tokyo as saying that the disparity in yields between the two foreign exchange markets in the United States and Japan will stimulate institutional and retail investors to buy and hold dollars. Japanese households have deposits of 1,000 trillion yen, and even a 0.1% “flight” will have a certain impact on the Japanese economy.
Japanese households’ savings have been increasing, while the yen has continued to weaken since this year, and the yen has fallen 20% against the dollar, the report said. The growing risk of capital flight from Japanese households should cause concern for the Bank of Japan, according to the head of Japan market research at JPMorgan Chase Securities in Tokyo. The director believes that Japan’s rapidly expanding trade balance to a record deficit, the unprecedented weakness of the yen’s exchange rate, and the gradual loss of purchasing power of the public have made the Japanese public feel the need to hold some foreign currency to minimize a series of risks due to the weakness of the yen.
Retail investment research firm Gaitame.com department head said, at present, Japan is still maintaining negative interest rates, which is “a very favorable environment for the flow of funds abroad.
National competitiveness fears decline
Japanese Nomura Research Institute economist Norihide Kinouchi commented on the 21st that Japan is suffering from the historic devaluation of the yen. Usually the depreciation of the yen will help exporters to improve international competitiveness, but individual consumers will have to suffer the pain of high prices. The interest rate differential between Japan and the U.S. caused by the “Japanese (dollar) cheap U.S. (dollar) expensive” will continue for a long time, high prices will also become a long-term trend.
Japan’s Mitsubishi UFJ Morgan Stanley Securities chief foreign exchange strategist Daisaku Ueno said in an interview with the Nihon Keizai Shimbun earlier, the yen last depreciated sharply in 1998, when the financial crisis, the capital market “short selling Japan” color, resulting in the continuous depreciation of the yen. This time, the yen depreciated against the backdrop of stagnant Japanese exports, reflecting the decline in Japan’s essential competitiveness as a country.
Akihisa Mizuno, president of the Central Japan Economic Federation, previously said that the depreciation of the yen is not entirely good for exporters. Mizuno Akihisa said: “Do not see a significant increase in Japanese exports with the devaluation of the yen. Moreover, a large number of companies in the manufacturing industry in Japan, such as automobiles, are in a state of non-production from time to time due to restrictions on chips and parts. Although many views that exporters will profit from the devaluation of the yen, but the current situation, it is difficult to say that the devaluation of the yen has brought a wide range of positive effects.”
Akihisa Mizuno also believes that from the perspective of companies, excessive fluctuations in the yen exchange rate can create uncertainty in business development plans. In order to stabilize the exchange rate, I hope the government will take relevant measures and study the support to those enterprises that cannot enjoy the dividends of the depreciation of the yen.
Chen Yan, executive director of the Japan Enterprise China Institute, said in an interview with the Global Times on the 22nd that under normal circumstances, the depreciation of the yen is beneficial to overseas tourists visiting Japan, but the impact of the new crown pneumonia epidemic has not led to the expected recovery and development of Japan’s tourism industry. At the same time, due to soaring global energy prices and frequent interest rate hikes by the Federal Reserve linked to record high inflation in Japan, leading to crazy price hikes in Japan, offsetting the export competitiveness brought by a weaker yen. High production costs, coupled with weak purchasing power, these are unfavorable for Japanese companies.
According to Chen Yan, the weakening of the yen means that its dollar-denominated economic indices are under pressure, such as the gross domestic product will shrink significantly. Japan wants to improve its national strength and restore economic prosperity can be changed in two ways: first, to carry out the innovation of the administrative system; second, to carry out technological innovation, promote the development of high value-added industries, focusing on innovative breakthroughs in high-tech fields to guide the yen to strengthen.