04 May 2024 09:01
On April 29, the Japanese currency rebounded sharply after hitting its lowest point since 1990 against the US currency. One hundred yen had reached 63 cents on the dollar, before rising to 65 in just under an hour (the price of the dollar in Japan therefore went from 160 to 154 yen). A very rapid recovery which, according to experts, could only have been favored by Tokyo’s intervention.
The Financial Times writes that the operation may have involved the purchase of yen worth between twenty and 35 billion dollars. However, Brad Setser, US economist at the Council on Foreign Relations, explained that Tokyo gained from this operation because it used dollars bought when they cost much less. “Since 2000, the Japanese government,” wrote Setser, “has bought $1,200 billion worth of dollars and euros, a reserve with which, in theory, it could cash in on one of the largest profits on the foreign exchange market in the history of finance.” .
The decline in the value of the yen on April 29 may be due to low demand: that day was celebrated in Japan Shōwa no hia holiday (the first of the so-called Golden week, golden week) which commemorates the birth of Emperor Hirohito, in office from 1926 to 1989. But in reality the currency has been under pressure for some time: since the beginning of 2024 the yen has lost around 11 percent against the dollar (it is the currency that performed worst among those of the large economies), while since 2021 it has lost a third of its value. The devaluation of the yen, which has always been considered a safe haven asset like the dollar and the Swiss franc, is linked to the underlying problems of the Japanese economic and financial system.
The shock came after the central bank left the cost of money unchanged on April 26. In March the institute had decided on an epochal turning point by abandoning the policy of negative rates, implemented for 17 years in the hope of putting an end to the prolonged stagnation of the national economy. Today, however, the cost of money still fluctuates between 0 and 0.1 percent.
This decidedly low threshold has attracted speculators, particularly those dedicated to carry trades, an operation that consists of borrowing capital in a currency with low interest rates to invest in financial instruments in other currencies with a higher return. The profit ensured by carry trades it is equal to the difference between the return on the investment and the cost of financing: many investors, in fact, borrow funds in Japan and invest them mainly in the United States, where interest rates are above 5 percent and are unlikely to fall in the next months.
Bloomberg writes that on May 2, immediately after the Federal Reserve (Fed, the central bank of the United States) reiterated that rates in the United States are destined to remain high, Japan prepared a second intervention to support the yen, spending another 28 billion dollars. To this, Reuters observes, we must add a sort of “loops self-fulfilling” typical of financial markets: “Essentially, the yen devalues because people sell it, but people sell the yen because they know it is devaluing.”
Furthermore, the downward trend means that Japanese exporters prefer not to exchange earnings obtained in other countries into yen, and at the same time pushes Japanese financial institutions to invest abroad. The Japanese are the largest foreign holders of U.S. government bonds and have invested in everything from Brazilian government debt to European power plants. Over the past decade, they have spent 54.1 trillion yen (more than four hundred billion dollars) on stocks, which corresponds to between 1 and 2 percent of the stock markets of the United States, the Netherlands, Singapore and the United Kingdom. .
All this, obviously, has direct effects on the national economy. The weak currency has increased the profits of exporting companies and has given an unprecedented boost to tourism: in February the country was visited by a record 2.8 million people, creating among other things many problems (it written by Junko Terao, Asia editor of Internazionale and editor of the In Asia newsletter). Additionally, the yen’s decline has eroded the competitiveness of Chinese and South Korean manufacturing companies.
But there are also downsides: since Japan imports many more goods than it exports, the weak yen means higher prices and therefore a higher cost of living and citizens who feel poorer. Suffice it to say that the price of imported goods has increased by 64 percent since 2020 and that the Asian country buys 90 percent of its energy and 60 percent of its food products abroad. Furthermore, at this moment Japan is finding it more difficult to attract foreign workers, which it now badly needs to support the economy. It is no coincidence that on April 26 the central bank reduced its GDP growth estimate for 2025, bringing it from 1 to 0.8 percent.
Tokyo’s interventions in support of the yen, however, may not be a definitive solution to the devaluation, nor to the problems of the economy, such as the chronic weakness of domestic consumption, the effects of the aging population and the enormous public debt, which at 263 percent of GDP is the highest in the world. Everything will depend on the decisions of the government and the central bank, which are called upon to make very difficult choices, taking into account that, as the Economist explains, “a weak yen is unpopular among Japanese consumers and therefore also among politicians”.
The central bank, in particular, has little room for maneuver: with such a high debt the institution is comfortable with rates close to zero. A sharp increase in the cost of money could attract more capital to Japan and therefore strengthen the yen, but at the same time it would significantly increase the cost of debt. Governor Kazuo Ueda must also evaluate other possible effects: according to some estimates, for example, an increase in the cost of money of one percentage point could devalue yen bonds by around nine trillion. Potential losses would correspond to 10 percent of capital for large banks, but 30 percent for smaller ones.
This text is taken from the Economica newsletter.
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