Concerns about a vicious cycle of yen 低… The Japanese government intervenes in the foreign exchange market for the first time in 24 years, but Jung Young-hyo’s analysis of Japanese industry

The Japanese government is very nervous about the possibility of a vicious cycle in which a large-scale current account deficit caused by a sharp decline in the value of the yen accelerates the ‘yen depreciation’ again. As the yen’s weakness in the range of 120 yen per dollar is expected to continue for a long time, there is even a forecast that the Japanese government can directly intervene in the foreign exchange market for the first time in 24 years.

In the Japanese foreign exchange market on the 30th, the yen per dollar moved in the high range of 121 yen. After the yen’s exchange rate soared to 125.10 yen, the highest in six years and seven months, on the 28th (the depreciation of the yen), it has continued to exceed 120 yen.

◆”Demand over 0.25%, dry the seeds”

The direct cause of the sharp decline in the yen is the conflicting financial policies of the central banks of the United States and Japan. In contrast to the U.S. central bank’s (Fed) raising interest rates to combat soaring inflation, the Bank of Japan has mobilized ultra-hard measures to lower interest rates.

From the 29th to the 31st, the Bank of Japan will conduct an open market operation to purchase unlimited 10-year government bonds at an interest rate of 0.25% per annum. It is a policy to keep long-term interest rates below the Bank of Japan’s target of 0.25% by drying up demand for transactions with interest rates above 0.25%.

It is the first time in the history of continuous open market operation to purchase unlimited government bonds for three consecutive days at a predetermined price. The US is in a hurry to raise interest rates, but Japan, on the other hand, put all its efforts to contain the rise in interest rates. As a result, the value of the dollar soared and the yen plummeted.

Bank of Japan Governor Haruhiko Kuroda is repeating his position that “the basic structure of the weak yen becoming a ‘plus’ for the economy and prices has not changed”.

However, critics continue to criticize that only some large exporting companies and the wealthy with overseas assets benefit from the weak yen. It is pointed out that small and medium-sized enterprises (SMEs), which account for more than 99.5% of Japanese companies, and the majority of Japanese are suffering from soaring import prices.

Eiji Hashimoto, chairman of the Japan Steel Federation (President of Japan Steel) also said at a press conference the day before, “There is a high risk that the yen’s weakness will be ‘minus’ for the first time (for the Japanese economy). when,” he pointed out.

Nevertheless, the general expectation is that it is unlikely that the Bank of Japan will halt a massive monetary easing policy to stem the yen’s weakness. This is because, unlike the US and Europe, Japan, where inflation does not lead to wage hikes, raises interest rates prematurely, and there is a high risk of a sudden cooling of the economy.

The prospect that the yen exchange rate will solidify at the level of 120 yen while the Bank of Japan cannot do this or that is gaining persuasive power. According to the Nihon Keizai Shimbun and the Nihon Keizai Research Center, the theoretical exchange rate of the yen, which reflects the current account and terms of trade, rose 16 yen from 105.4 yen in the third quarter of 2021 to 121.7 yen last month.

In general, the actual exchange rate, which reflects the trading trends of speculative forces and the international situation, differs from the theoretical exchange rate by 5 to 10 yen. Because of this, the Nihon Keizai Research Center predicted that the value of the yen could drop to 130 yen.

◆Annual current deficit for the first time in 40 years?

After 2010, when Japanese companies actively entered overseas markets to avoid the ‘high yen’, Japan’s trade surplus decreased and the capital account surplus increased. This is because, while exports reflected in the balance of trade decreased, dividends and interest income from overseas assets that were captured in the capital balance increased.

The current account, which is the sum of the trade and capital balances, has maintained a surplus. However, Japan’s current account posted a deficit of 1.18 trillion yen in January as imports surged due to a sharp rise in raw material prices. It is the second largest ever. Some forecast that Japan’s current account will record a deficit for the first time in 40 years on an annual basis if the rise in raw material prices continues for a long time.

This is why the foreign exchange market is concerned that the deteriorating current account will encourage the selling of the yen, which will cause the yen to depreciate again and repeat a vicious cycle. The observation that the Ministry of Finance will step out to prevent the vicious cycle of the foreign exchange market in a situation where the Bank of Japan is tied up is the background that is gaining strength.

Japan’s Treasury Minister Masato Kanda, who had a meeting with U.S. Deputy Treasury Secretary Andy Vocall (acting) the day before, said, “The monetary authorities of the United States and Japan have confirmed to communicate closely on foreign exchange issues.” After Kanda’s press conference, the foreign exchange market is expected to intervene in the foreign exchange market jointly by the monetary authorities of the United States and Japan.

The last time the Japanese Ministry of Finance purchased yen from the foreign exchange market and intervened directly in the exchange rate was in June 1998. The interest in the foreign exchange market is how aggressively the US keeps pace. In the United States, it is better to manage inflation by maintaining the dollar’s strength as it is now.

For this reason, the newspaper worried, “If the Japanese government intervenes prematurely in the foreign exchange market on an intermediate scale, there is a possibility that speculators who expected a further weakening of the yen may encourage selling of the yen.”

Tokyo = Correspondent Young-hyo Jung hugh@hankyung.com