1. Reasons for Japanese Yen to hedge
yen to hedge attributes are mainly based on the following factors:
1. In the past five decades, Japan has been the second largest economy in the world in capitalism , and GDP is second only to the United States. Japan economy strong strength.
2. In the past three decades, Japan has been the world's largest creditor and foreign investment in countries. Japan's foreign debt amount exceeds US$3 trillion.
3, the Bank of Japan has maintained low interest rates for a long time, and has even dropped to negative interest rate (-0.1%) since 2016, resulting in extremely low borrowing costs of the yen, becoming the most popular low-interest financing currency in the global financial market. The yen loan cost represented by TIBOR (Tokyo interbank lending interest rate ) is close to 0 for a long time. You can see the screenshot of the TIBOR interest rate below.
4, borrow yen, exchange it into other currencies before investing, which has become a popular arbitrage trading model around the world. Therefore, the liquidity of the yen has promoted the development of global financial markets.
2. Specific gameplay of yen arbitrage
Example: An American investment institution borrowed 130 billion yen at a cost of 0. According to the market exchange rate of USD/JPY of 130, it was exchanged into 1 billion US dollars, and purchased Apple Apple stock . When the US dollar/JPY exchange rate remains unchanged, if Apple stocks rise, the investment institution can make a profit.
yen safe-haven case description:
continues the above case. Assuming that the price of falls by 5%, the investment institution will take the following actions in order to avoid further losses:
A, stop loss in time, sell Apple stocks, exchange US dollars for yen, and repay previous yen loans; or
B, continue to hold Apple stocks, but at the same time use financial instruments to hedge the risk of yen exchange rate fluctuation (mainly the risk of yen appreciation) to avoid the increase in the pressure on yen debt repayment.
Whether it is A or B, it will lead to an increase in the market demand for the yen, thereby driving the appreciation of the yen. Therefore, the appreciation of the "help-haven" of the yen is passive and closely related to the arbitrage trading of the yen.
Bank of Japan Governor Kuroda Haruhiko
yen arbitrage trading is widely present in the global financial markets, involving major fields such as stock markets, bond markets, real estate markets, and foreign exchange markets. Therefore, disturbances and crises around the world often lead to the appreciation of the yen and become a "safe-haven" currency.
3. The special significance of maintaining stability of the Japanese yen exchange rate
For the global financial market, maintaining stability of the Japanese yen exchange rate means that there is a cheap and reliable financing arbitrage tool, which is conducive to the stability of the global market. In fact, from November 2021 to early March 2022, the US dollar/JPY exchange rate has been stable for a long time, but it only fluctuates narrowly around 115, which provides guarantees for the stability of the financial market. You can see the screenshot below
4. Danger of appreciation of the Japanese yen exchange rate
appreciation of the Japanese yen means that the cost of arbitrage transactions increases (investors need to buy back the yen at a higher price and repay the loan), which will put pressure on the financial market. Therefore, the appreciation of the yen is often accompanied by market turmoil and crises.
5. The special significance of the depreciation of the Japanese yen exchange rate
For arbitrage transactions, the depreciation of the Japanese yen is very popular because it means that the cost of arbitrage transactions is decreasing (the yen is cheaper and the debt repayment pressure is smaller), and the depreciation of the Japanese yen is often accompanied by the increase in arbitrage transactions. The more easing the Bank of Japan is, the more obvious the depreciation of the yen, and the more active and popular arbitrage transactions are.
How to understand the huge depreciation of the yen that began in March?
Based on the above content, it can be understood that the depreciation of the yen is conducive to the stability and confidence of the global financial market.But the huge depreciation of the yen began in March is very strange. Why does the Bank of Japan choose to increase its easing and relaxation efforts at this time? This is closely related to the war and sanctions between Europe that broke out at the end of February! The European war has caused the global financial market to face huge pressure and uncertainty. In addition, the Federal Reserve's interest rate hike and balance sheet reduction is imminent, and the market may experience turmoil and panic; at this time, financial institutions need to inject enough liquidity into the market to avoid the outbreak of a crisis and maintain the stability of the global market. It is most appropriate to undertake this stability maintenance task by the Bank of Japan! Therefore, the depreciation of the yen that began in March is essentially to maintain the global financial market!
6. The inevitability of the subsequent appreciation of the yen
The sharp drop in the yen started in March means that global finance has injected a large amount of yen liquidity, barely maintaining market confidence. However, as the crisis becomes increasingly greater and uncertain factors become more and more difficult, the cost is also increasing. Once the market is difficult to maintain the situation, it will lead to huge panic, and the arbitrage trading mechanism will force the yen to appreciate, and even a stampede appreciation...
summary
Japan's large-scale expulsion since March has delayed the outbreak of the global crisis, but it is only temporary. The global financial market still continues to be greatly turbulent, which indicates that the current illusion of stability maintenance is difficult to sustain... Therefore, we need to be vigilant about the appreciation of the yen.
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