21 Century Economic Report reporter Hu Huiyin reported Since the Federal Reserve entered the interest rate hike cycle, Asian currencies have continued to be under pressure. Due to differences in monetary policy between the Bank of Japan and the Federal Reserve, the yen's exchange rate against the US dollar briefly fell to a 24-year low last week. Since the beginning of this year, the Japanese yen has depreciated by more than 18%. At the same time, the Bank of Japan continued to purchase most of the Japanese government bonds on the market, causing distortions in the bond market, including an inversion of the yield curve.
What risks will the continued depreciation of the yen bring to Japan and neighboring Asian countries? How has Japan's economic structure changed after the 1997 Asian financial crisis? In the context of the gradual "hawkish" monetary policy in Europe and the United States, can the Bank of Japan withstand the pressure and continue its quantitative easing policy?
Ye Bingnan, an economist at CMB International Capital Co., Ltd., recently pointed out in an exclusive interview with a reporter from the 21st Century Business Herald that after the Asian financial crisis in 1997, Japan suffered from a bubble economy, and its domestic industrial capital began to transfer to other Asian economies. The collapse of the bubble economy led to a compound recession of shrinking private balance sheets and deflation of the real economy. Today, the Japanese economy's share of global GDP has dropped from 18% in 1995 to less than 5% in 2021, making it difficult to further improve the Japanese yen's settlement status in Asia.
While the Japanese yen continued to depreciate, Asian currencies also experienced significant depreciation. Ye Bingnan pointed out that the depreciation of the yen will indeed have a certain spillover effect on the entire Asian region, especially on the product exports of economies that compete with Japanese products, and will have a negative impact. But unlike 1997, major Asian economies such as China, ASEAN, and India have grown up, forming a balance between Japan's spillover effects.
Ye Bingnan believes that the monetary policy adopted by the Bank of Japan will take into account the recovery of its domestic economy and the evolution of future inflation. In the long term, the yen exchange rate may undergo a phased recovery.
(CMB International Economist Ye Bingnan)
The decline of the yen is accompanied by the depreciation of Asian currencies
"21st Century": The yen exchange rate hit a 24-year low, with a cumulative depreciation of more than 18% this year. Since 1996, Japan has tried to stimulate the domestic economy through the depreciation of the yen, and the country has experienced a huge trade surplus as a result. Today, the yen has depreciated significantly due to the dual factors of the Federal Reserve's interest rate hike and loose monetary policy . Why can't it achieve the goal of stimulating the economy in 1997? How has Japan's economic structure changed?
Ye Bingnan: Since 1997, Japan has been trying to stimulate the economy without success. A very important reason is that from the 1980s to the early 1990s, Japan experienced an economic bubble due to demographic and other structural changes. The bubble economy has done great harm to Japan's real economy, causing Japan's domestic industries to shift to other Asian economies. Since then, Japan's domestic industries have experienced a "hollowing out" phenomenon. Nowadays, with the decline and aging of Japan's population , the growth of its domestic demand and market size has dropped significantly, and Japan has entered an era of ultra-low growth.
The superposition of Japan's structural factors and the bursting of the bubble economy has brought about falling asset prices and a large number of bad debts by banks. It has produced a compound recession of shrinking private balance sheets and deflation of real prices, which has directly caused Japan's economic growth rate to remain constant. lower.
Today, Japan wants to use exchange rate depreciation to stimulate exports, but this method can only play an indirect role, because the core factors that determine export performance are external demand and its own industrial chain status. And considering that a large number of Japanese product exports belong to Asian intra-industry trade, although the depreciation of the yen will have some impact on the pricing system within Asia, I think its role in stimulating overall exports cannot be overestimated.
Compared with exchange rate , the more important factor in determining changes in export share is the country's competitiveness in the global industrial chain system.In fact, Japan has its competitiveness and status at the global level. For example, in high-end new materials, automobiles, animation and other industries, Japan has obvious competitive advantages. In addition, Japan's per capita GDP is also ranked first in Asia. At the forefront, with this status, Japan is expected to achieve sustained positive growth in per capita income. However, due to the small size of its domestic market, the aging of the population, and the substitution and transfer of industries, Japan is obviously lagging behind in the revolution of emerging industries such as the Internet and new energy, and is unlikely to achieve higher growth.
"21st Century": Will the sharp depreciation of the Japanese yen have a significant impact on the local manufacturing and exports of Asian countries with similar trade structures? Currently, Asian currencies such as the Korean won and the Thai baht are depreciating. Do you think this is competitive depreciation? How will these Asian countries face the continued depreciation of the yen?
Ye Bingnan: The United States is currently facing high inflation. For this reason, the Federal Reserve has tightened monetary policy significantly, and US dollar interest rates have also risen sharply. Against this background, the Bank of Japan has always adhered to its loose monetary policy, resulting in continued depreciation of the yen. On the surface, the performance of the exchange rates of Asian currencies relative to the US dollar is accompanied by changes in spreads , but in essence they all depend on changes in the relative strength of each country's economy.
In this round of depreciation of non-US currencies, there are obvious differences in the depreciation of Asian currencies against the US dollar, mainly due to obvious differences in the economic fundamentals of Asian countries. The currencies of South Korea and Thailand have depreciated relatively sharply because their debt ratios have increased rapidly during the US dollar's water release cycle in the past two years, and their asset prices have also adjusted relatively much during the US dollar's water recovery cycle. The depreciation of the yen will indeed have a certain spillover effect on the entire Asian region, especially on the product exports of economies that compete with Japanese products.
But in general, the current depreciation of the yen will not trigger a new round of systemic financial crisis in Asia, because the current situation is still very different from that in 1997.
First of all, major economies in Asia have experienced the impact of the Delta and Omicron virus epidemics since last year, and are in the process of economic recovery from the second half of this year to the first half of next year.
Secondly, the vulnerability indicators of Asian economies, including external debt ratios and current account balances, are relatively stable overall except for individual economic indicators that are not healthy.
Furthermore, over the past 20 years, Japan's proportion in the global economy and trade has continued to decline, and its influence is no longer the same as it was in the 1990s. In 1995, Japan's share of global GDP was 18%, but today, this share has dropped to less than 5%. Today, Japan's economic and trade spillover effects on Asia as a whole and even the world are relatively small. Today, economies such as China, ASEAN, and India have grown up, creating a balance for Japan's spillover effects in Asia.
For Asian economies, repairing the economy as soon as possible and maintaining the stability and health of the economy are the most important factors in preventing financial risks.
The yen faces challenges in improving its international settlement status
"21st Century": Over the years, Japan has focused on strengthening cooperation in the Asian region and promoted the settlement of yen in export trade. As the fifth most active currency in the world, and against the background of frequent interest rate hikes by the Federal Reserve, do you think the Japanese yen can become the main pricing currency for exporters in Asia in the future? What conditions need to be met to continue to enhance the yen's status as an export trade settlement in Asia?
Ye Bingnan: The application of the Japanese yen in trade settlement is mainly concentrated in Japan’s cross-border trade, and its usage ratio is second only to the US dollar. But as Japan's share of the global economy and trade has declined over the past two decades, so has the yen's share of international payments worldwide. This also makes it difficult to further improve the settlement status of the Japanese yen in the entire Asian region.
On the other hand, as the Japanese economy declines in global weight, it can be seen that Tokyo's status as a financial center has also declined. At the same time, Japan's financial market is obviously less open than Europe and the United States. These conditions have restricted the further consolidation and improvement of the Japanese yen's role as an international currency.
If the Japanese yen wants to improve its export trade settlement status in the Asian region, the most fundamental factors are two factors: first, Japanese companies must maintain the momentum of continuous improvement in competitiveness in the Asian industrial chain; secondly, Japanese The financial market needs to become more developed and open, and its status as an important financial center in Asia needs to be further improved. Only when these conditions are met can the international market's acceptance of the adoption of the yen be significantly improved.
The depreciation of the yen may slow down
"21st Century": Recently, Japan's 10-year government bond yield once exceeded the yield curve control (YCC) prescribed by the Bank of Japan, which means that overseas investors are selling government bonds. In the context of the "hawking" in Europe and the United States, can the Bank of Japan withstand the pressure and continue its quantitative easing policy? Do you think this will exacerbate the depreciation of the yen?
Ye Bingnan: Currently, the Bank of Japan is indeed facing pressure to adjust its monetary policy stance. Nowadays, global inflation has risen sharply, and central banks in the United States and Europe have turned "hawkish" and entered a tightening cycle. If we look at the Japanese economy itself, it is actually on the path of continued recovery. Japan's GDP growth is expected to return to more than 1.5% year-on-year growth in the second half of the year. As Japan suffered the impact of the epidemic last year, the year-on-year base was low. In addition, although Japan's inflation is relatively low among developed economies, it also rose significantly in April and has now risen to more than 2%. It is expected that inflation will be above 2% for at least the next two quarters. In this case, the Bank of Japan may adjust its monetary policy stance.
However, in the short term, the Bank of Japan will exit its loose monetary policy at a slower pace than the Federal Reserve. In this case, the Japanese yen is generally weak. The yen may only rebound after the Fed slows down its tightening pace or the Bank of Japan turns significantly hawkish. Overall, as some factors change, the depreciation momentum of the yen may slow down.
"21st Century": In the past, the yen relied on the arbitrage mechanism to become a "safe haven asset" for international funds. Why did the yen's hedging function fail this time?
Ye Bingnan: I think that on the one hand, it has something to do with the Bank of Japan’s easing stance amid the tightening trend of central banks in the United States and Europe. On the other hand, it also has a lot to do with the direction of capital flows caused by geopolitical risks triggered by the Russia-Ukraine conflict. After the United States and Europe launched sanctions against Russia, investors paid close attention to factors such as geosecurity and energy security, and capital once tended to flow back to the United States. Prices of energy, raw materials and agricultural products have all risen sharply recently. Japan has obvious flaws in geosecurity and energy independence. After Japan joined the ranks of sanctions against Russia, the outside world generally has concerns about Japan's energy supply security.
When will the Bank of Japan intervene?
"21st Century": As of April this year, Japan's debt scale has climbed to 1,253 trillion yen, equivalent to 2.6 times domestic GDP. At the same time, Japan is also the world's largest creditor nation. If the yen continues to depreciate and Japanese bond yields rise, will Japan fall into a debt crisis and cause systemic risks?
Ye Bingnan: Japan’s current debt level is indeed very high, most of which is government debt, accounting for nearly twice the country’s GDP. If the interest rate on Japanese government bonds rises sharply, it will indeed put greater pressure on the Japanese government's finances. This challenge is indeed quite large.
But I think the Bank of Japan is very aware of this risk. For now, almost half of Japan's national debt stock is actually held by the Bank of Japan, which means that the entire Japanese government's debt and yields are controlled by the Bank of Japan. Therefore, once crisis risks arise, the Bank of Japan should take action.
"21st Century": To what extent will the Bank of Japan allow the yen to depreciate? If the excessive depreciation of the yen reaches a level that the central bank cannot bear, does the Bank of Japan have any plans to intervene? Can it follow the example of the Swiss National Bank in controlling the exchange rate of its own currency through the foreign exchange market?
Ye Bingnan: The way the Bank of Japan intervenes in the depreciation of the yen does not necessarily have to be through direct foreign exchange transactions.Judging from the past history of foreign exchange intervention by the Bank of Japan, substantial depreciation of the yen is not uncommon in history. For example, between 2013 and 2016, the yen depreciated by 40%.
During the Asian financial crisis in 1998, Japan implemented intervention measures. Judging from past experience, I think the Bank of Japan will not necessarily intervene through foreign exchange trading, but may adjust its policy stance. Because the Bank of Japan may face pressure to adjust its easing stance, the issue now lies in the critical value. In the future, we have to take a look at Japan's economic recovery and inflation in the second and third quarters. If Japan's GDP growth reaches more than 1.5% for two consecutive quarters, that is, exceeds its potential growth rate, and core CPI can exceed 2% for two consecutive quarters, then I think this will help Japan get rid of its deflationary situation. In this case, the Bank of Japan may consider adjusting its easing policy.
"21st Century": Will the uncoordinated monetary policies implemented by Japan and major developed economies affect the effectiveness of tight monetary policies implemented by economies such as the United States and Europe to control inflation and promote the economy? Will the Bank of Japan change the direction of monetary policy under pressure?
Ye Bingnan: The spillover effect of the Bank of Japan’s monetary policy on the United States and Europe is relatively small. Japan's capital flows have distinctive characteristics, that is, the proportion of foreign direct investment and cross-border bank loans to Asian economies is relatively high. Therefore, the Bank of Japan's loose monetary policy has obvious spillover effects on these Asian economies, which will To a certain extent, hedges the effect of 's contraction of U.S. dollar liquidity by the Federal Reserve.
Regarding what kind of monetary policy to adopt, the Bank of Japan still considers the recovery of Japan’s domestic economy and the evolution trend of future inflation.
Japan's loose monetary policy will have a certain boost to the economy, but whether it can achieve its expected effect, I think, will be restricted by many factors. First of all, global monetary policies are in a tightening cycle, which has a significant impact on the spillover effects of Japanese financial markets and the economy; secondly, the outside world is more worried that there will be an economic recession in the United States next year, which will have a negative impact on Japan. There is a clear impact on exports, as the United States remains Japan's largest exporter.
For now, the yen may still have some room to depreciate, depending on whether the divergence of the monetary policies of the Bank of Japan and the Federal Reserve is expanding or narrowing. The current high inflation in the United States is significant, so the Federal Reserve is actually still in the process of accelerating tightening, so the Japanese yen is more likely to depreciate further in the short term. By the second half of next year, the probability of a recession in the U.S. economy is relatively high, so the differentiation between the monetary policies of the Bank of Japan and the Federal Reserve may narrow, which means that in the medium term, the yen may undergo a phased recovery.
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