Has Japan's Exchange Rate Suddenly Collapsed?

Has Japan's Exchange Rate Hit a Multi-Decade Low?

Just yesterday, the Japanese yen exchange rate suddenly plummeted, falling to a level of 1 US dollar: 151.97 yen at one point, marking a 34-year low. Even the Japanese Finance Minister had to step forward to state: The Japanese government is closely monitoring the foreign exchange market, and if necessary, will take "bold" actions at crucial moments.

Some may ask, hasn't the Bank of Japan recently implemented an "epic" interest rate hike? Wouldn't an interest rate hike be beneficial for the yen? So why would the yen continue to depreciate?

In fact, although the Bank of Japan announced an interest rate hike, the yen, as an important currency in the foreign exchange market, is not solely influenced by domestic monetary policy. More importantly, it also depends on the actions of the Federal Reserve. So far, the United States' scythe for harvesting the world continues to swing.

Advertisement

Today, let's discuss this black swan event in Japan, and then talk about how these events might affect China.

Why Did It Plunge Despite the Interest Rate Hike? Japan Encounters a Black Swan?

Regarding Japanese finance, the most significant recent event is the interest rate hike by the Bank of Japan. As we have mentioned before, Japan, being a country with long-term deflation, has always maintained a negative interest rate policy to stimulate the recovery and development of the Japanese economy. Even during the era of the Federal Reserve's interest rate hikes, Japan continued to adhere to its negative interest rate policy.

However, this month, the Bank of Japan announced the end of negative interest rates, raising the domestic interest rate to 0%-0.1%, exiting the era of negative interest rates and ending "yield curve control," transitioning from a negative interest rate to a low interest rate era.

Generally speaking, an interest rate hike is beneficial for the domestic currency. After the Federal Reserve's interest rate hikes in 2022, the US dollar index rose significantly, with the dollar appreciating and the Chinese yuan, yen, and euro all depreciating, with the dollar maintaining its strength to this day.However, after this yen interest rate hike, it is clear that Japan's $4 trillion in assets will gradually flow back, strengthening the yen exchange rate. So why has the yen exchange rate suddenly plummeted, setting a historical record?

This is actually another "black swan" event released by the Bank of Japan. Due to the interest rate hike in Japan, foreign exchange speculation has intensified. Bank of Japan Board Member Naoki Tamura stated to the media that the Bank of Japan needs to steadily promote the "normalization of ultra-loose monetary policy." This is the "black swan" released by the Bank of Japan.

After the news came out, the US dollar strengthened, and the yen depreciated instantly. Non-US dollar currencies also began to weaken. After the US dollar strengthened, the Chinese yuan also started to weaken.

In addition, although the Bank of Japan announced its exit from negative interest rates, they stated that in order to achieve Japan's 2% price target, they will still maintain the current scale of government bond purchases. This means that the Bank of Japan is still continuously releasing funds and maintaining a loose economic policy.

Speculators causing trouble? The Japanese government is on high alert!

In addition to the impact of the United States delaying interest rate hikes, the role of international financial groups is also significant. As the yen exchange rate collapsed, Japanese central bank officials held an emergency meeting overnight, stating that the reason for the weak yen exchange rate was due to attacks by international financial groups.

Therefore, Japanese Finance Minister Shunichi Suzuki and Chief Currency Officer Masato Kanda jointly stated that Japan will pay attention to the exchange rate market and prepare relevant measures. They will not tolerate market speculation, and at this time, the yen has warmed up a bit.

Japanese debt accounts for 217.49% of GDP.

However, in fact, the Japanese government has no other options but to continue borrowing, allowing the central bank to purchase yen to support the yen exchange rate. Of course, the strength of the Bank of Japan is also very strong, and ordinary international financial groups really dare not cause trouble. Especially when the Japanese economy is recovering.

How does the significant depreciation of the yen affect China?For those who follow the exchange rate of the Chinese yuan, they will notice that the recent exchange rate of the yuan to the US dollar has fallen to 1 US dollar: 7.25 yuan, indicating a certain degree of devaluation of the Chinese yuan. So, how much impact has the recent turmoil in the exchange rate market had on the Chinese yuan? The key is still to look at the trend of the US dollar.

Firstly, the Swiss National Bank unexpectedly cut interest rates by 25 basis points and expressed its willingness to be the first to cut interest rates among Western economies, which led to the strengthening of the US dollar. The yuan came under pressure. Therefore, the recent sudden devaluation of the yuan is not directly caused by the United States and Japan, but by the European Central Bank.

The second reason is the depreciation of the Japanese yen. After the yen depreciates, it will lead to an increase in the US dollar index, and an increase in the US dollar index will lead to the devaluation and pressure of the yuan. So, the depreciation of the yen equals the devaluation and pressure of the yuan.

This means that we need to pay attention not only to the European Union and the United States but also to the yen. If Japan's exchange rate collapses, the yuan's exchange rate will not be better.

The third reason is actually the United States itself. The Federal Reserve's recent exchange rate policy has been constantly changing. It first said it would cut interest rates in July, but last Wednesday, the Federal Reserve said it would cut interest rates in June. Coupled with the United States' continuous borrowing to stimulate the economy, the US economy is very strong, so the performance of the yuan is relatively weak.

Why is the yuan performing so weakly? It is actually due to Switzerland's interest rate cut, Japan's interest rate hike, and the United States' borrowing to stimulate the economy. Although China is also continuously releasing good news, the strength is not very great. Or the domestic interest rate keeps cutting, leading to a large interest rate difference between China and the world, which is not conducive to the strengthening of the exchange rate.

After all, the domestic "risk-free interest rate" is already so low, while other countries' interest rates are high. The capital in China is mainly outflowing, and it is not very possible to be too strong. Being able to stabilize the current exchange rate is already a good achievement.

In order to prevent risks in the yuan exchange rate, the central bank has been closely monitoring the exchange rate market since the year before last. For example, at the press conference on March 21, the central bank stated that it would "strengthen expectation guidance and prevent the risk of exchange rate over-adjustment." This means that if the yuan continues to depreciate, the central bank will definitely intervene.

As long as the central bank is willing to intervene, coupled with China's huge foreign exchange reserves and economic fundamentals, although the yuan may still fall a bit, it will not break through the 7.4 threshold, and the central bank will definitely stabilize the exchange rate market.

As long as we wait until the Federal Reserve cuts interest rates in June, the US dollar index will start to weaken continuously, and then China's foreign exchange depreciation problem can be completely solved.Summary

In general, the collapse of the Japanese yen exchange rate is favorable for the rise of the US Dollar Index, and the rise of the US Dollar Index, in turn, leads to the depreciation of the Chinese yuan. Therefore, problems with the yen are not entirely positive.

However, fortunately, since the second half of last year, China's economy has been continuously recovering with favorable developments. Our basic yuan position is actually quite stable. Although the yen's interest rate hike and depreciation are bearish for the yuan, as long as the central bank intervenes, all problems can be easily resolved, and we do not need to worry about this.

In conclusion, we hope that China's economy can continue to recover. As long as the fundamentals of China's economy remain stable, the issue of currency devaluation can be easily resolved, and we will have won this "currency defense war"!