Forex traders who are betting on a yen bounce should talk to policy veterans who are more knowledgeable and not the current ones.
Officials from the Bank of Japan, Shunichi, Suzuki, Masato Kanda, and Kazuo Ueda, the yen’s government, argued that the renminbi is a victim of the Japan-US offer gap, while the yen was at its lowest point over the past year.
This is bedroom, as Hiroshi Watanabe, past vice minister of finance for foreign affairs, tells Nikkei Asia. Yet if Tokyo participates suddenly, there’s little opportunity for the yen to march from 159 then history, say, 150 to the US dollar, he says.
In the days to come, the chances are that the yen will continue to decline. The purpose: Tokyo’s 25- year- ancient poor- yen strategy is blowing up on Asia’s next- biggest economy in real time, leaving the currency on a upward path.
” The level of japanese loss in recent years is startling”, says Robin Brooks, scholar at the Brookings Institution. The Turkish lira, which has traditionally been the weakest money in the major markets, has lost more in real terms than the renminbi. However, since the end- 2019 – since only before Covid hit – only one money, the Egyptian pound, has fallen more than the yen in true terms”.
Brooks adds that,” no surprisingly, the level of this loss has sparked controversy on its drivers and how much further it can expand”. On some level, he explains, “yen weakness stems from Japan’s extremely high debt, which forces the bank to cover long- term government bond yields via available- ended bond buying”.
Finally, Brooks concludes,” Japan is a sobering stories about letting debt fall unchecked. Countries can impose limits on state bond yields with the help of their main businesses, but doing so only leads to weak currency depreciation.
Now that Watanabe is no longer employed directly by the government and is leading a Tokyo think tank, he can explain why the yen should n’t be viewed as a safe haven asset. And why does the market wager that the Ministry of Finance’s intervention wo n’t succeed?
A number of Asian governments have been using a weak yen-only strategy to encourage growth and combat inflation since the late 1990s. After Chinese officials claimed they were moving away from the old beggar-thy-neighbor policies, the ploy gained perhaps more significance.
The Liberal Democratic Party’s resumption of power in late 2012 is referenced below. With a strong plan to boost the business, Prime Minister Shinzo Abe came back into power.
Abe compared victory to the warrior analogy, which depicts how three projectiles fired at a target. Abe’s bolts, aimed at slaying depreciation, included intense monetary easing, more imaginative macroeconomic policies and a reform Big Bang.
However, structural changes to cut red tape, revive innovation and productivity, enable people and attract more major global skills were few and far between. Similar to how to create a new fiscal stance. Over the past 14 plus years, debt has remained high.
Instead, Abe prioritized lower interest rates and a weaker yen. To further the quantitative easing initiative that Tokyo had instituted in 2001, he appointed Haruhiko Kuroda as governor of the Bank of Japan in 2013. The BOJ had more stocks and bonds than it had in 2013 and 2018, so much so that its balance sheet surpassed Japan’s US$ 4.7 trillion gross domestic product.
Count the ways this strategy is backfiring. As the Fed tightened in 2022 and 2023, the yen’s weakness deepened. That made Japan vulnerable to rising oil, food, and other important imports.
According to economist Atsushi Takeda of the Itochu Research Institute,” the ideal scenario would be for wage gains to be passed on to prices and for prices to rise steadily.” Instead, “bad” inflation imported from abroad is undermining household and business confidence.
Goushi Kataoka, a former BOJ board member, notes that” cost- push pressure is heightening at a degree never seen before, prodding firms to raise prices”.
The yen’s decline is also gaining new life. It is possible that yen selling as a result of a certain threshold, as long as US-Japan rate differentials are above a certain threshold, even with some rate differential narrowing, says Barclays ‘ strategist Shinichiro Kadota.
However, the yen is falling because of investor confidence in the currency. So far this year, the yen is down more than 13 %. Its current course is raising questions about whether China will decide to accept a lower exchange rate as well. The yuan is on the verge of breaking point since 2008;
A weaker yuan is suggested as the best way to address the deflationary pressures on China. However, Japan’s experience serves as a warning about the advantages of putting aggressive monetary policy policies before policies to boost competition and disruption.
The BOJ basically inaugurated the biggest political and corporate welfare scheme in history. Since the late 1990s, it has made it more important for the 13 governments to rebalance growth engines and establish level playing fields.
Corporate executives felt less pressure to innovate, change, and take significant risks. For two- plus decades, it’s been easier to harness BOJ support than for CEOs to disrupt industry. In 2024, Ueda’s BOJ team is currently plagued by that BOJ-enabled complacency.
The yen is sagging again because it is Tokyo’s only real policy, as Watanabe and other Japanese policy veterans now acknowledge. This explains, in part, why Ueda has avoided any chance even just to start the process of normalizing rates. Ueda has jumped at every chance he has had to signal that change is on the way in his 14 plus months in charge.
The yen is still in secular-declining mode even if the MOF intervenes in the coming days. Too quickly is the BOJ able to feel at ease braking against the economy. Nor does Tokyo’s political environment encourage tighter policy.
The approval rating for the LDP’s current prime minister, Fumio Kishida, who is now 21 %, is the only factor that is falling faster than GDP. Ueda wants to blame the BOJ for causing Japan to go into recession, but that is last. The BOJ keeps its foot on the gas, but the yen drops as it goes.
According to Kelvin Wong, senior analyst at currency broker Oanda,” softer prints of Japanese economic data may cause BOJ to delay its next interest rate increase to September in addition to the near-term increase in geopolitical risk premium coming out of the Eurozone as a result of the looming first round of French legislative elections scheduled this Sunday, June, supporting potential bids on the US dollar due to safe-haven demand.”
Japan contracted 1.8 % year on year in the January- March quarter. The one bright spot is exports, which are “having a positive impact”, says Yeap Jun Rong, market analyst at , IG Asia Pte.
There’s an argument, though, that Japan’s economy is in worse shape than the official data suggest.  , Marcel Thieliant, economist at Capital Economics, points to hopes that exports alone will save the day.
He claims that the majority of the rise in trade values was caused by the yen’s sharp decline rather than by any discernible increase in volumes.
One wild card is the November 5 US election. If Beijing lets the yuan weaken, too, exchange rates could become a big controversy in Washington. No issue brings together Republicans led by President Joe Biden and Donald Trump like beggar-thy-neighbor scheming in Asia. That could add fresh fuel to trade- war politics in Washington, provoking retaliation in Beijing.
However, making up a claim that Japan is responsible for Washington’s policy is ineffective is not more credible. The preponderance of the data refutes both contentions.