• News
• 2024-06-02

Global Financial Shock: Japan's Currency Collapse?

Many people are not aware that the level of risk in the global financial system is rising sharply.

Global financial crisis, risks are rising dramatically!

According to the latest report from the International Monetary Fund (IMF), financial systems around the world are currently facing severe challenges, and financial stability is very concerning.

For example, the recent Asian currency defense war, the collapse of the yen exchange rate, and the exchange rates of Southeast Asian countries are not very good either; then there is the Federal Reserve's interest rate hikes leading to a severe global debt crisis, international capital liquidity is concerning, and the pressure brought by high leverage has even put many countries on the brink of bankruptcy.

What's more terrifying is that the United States, the world's largest economy, is also facing problems. The GDP growth rate in the first quarter plummeted, inflation continued to climb, and the United States seems to have fallen into a terrifying "stagflation" crisis.

Is the era of stagflation coming? U.S. inflation has exploded again!

So, facing a series of global financial shocks, what will be the impact in the future? How will the international financial system evolve? Are RMB assets still safe?

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The rise in global financial risks, and the United States adds fuel to the fire?

Where does this risk come from? Essentially, it is a manifestation of the dollar tide.

After the 2008 financial crisis, the United States and other major Western economies, in order to stimulate the economy, have long adjusted interest rates to near 0%, which has led to very loose market liquidity. It is very easy to borrow money, and the interest rate level is very low, basically requiring almost no interest.Many developing countries, such as those in Africa, South America, and Southeast Asia, saw loan interest rates as being so low that they borrowed a lot of money to develop their national economies. This led to good economic and infrastructure development in these countries during those years.

Southeast Asian countries borrowed money to develop their economies, for example, Vietnam has been developing quite well.

However, since 2022, things have changed. First, the Federal Reserve has been continuously raising interest rates, causing global capital to flow back to the United States, turning it into a "black hole" in the financial market that continuously devours liquidity.

Secondly, many countries have found that the interest rates for borrowing money are now very high, because in the world's monetary system dominated by the US dollar, the US dollar interest rate basically determines the world's interest rate. The current US federal funds rate is 5.25%-5.5%, and the yield on the US 10-year Treasury bond is 4.63%, which means that the interest rates for countries to borrow money will be very high.

If the economy is developing well, then repaying this money is relatively simple, and there will be no debt problems; but we must realize that the process of the Federal Reserve raising interest rates is accompanied by an economic recession, because the price of curbing global inflation is the sacrifice of economic development speed. This side effect is inevitable.

The side effect of the Federal Reserve raising interest rates is global recession and reduced liquidity.

Under such a trend, countries around the world have encountered exchange rate, debt problems, and crises. For example, the Indian Ocean country of Sri Lanka has declared bankruptcy, and the South American country of Argentina has encountered exchange rate problems and debt crises, and so on.

This crisis has continued to the present and has erupted in East Asian countries, and the country that has recently been in the headlines is actually Japan.

Japan is one of the victims of this global financial turmoil, and the recent series of policies by the United States have actually played a role in harvesting Japan.

For example, the Federal Reserve's monetary policy has taken a clear turn. The previously promised interest rate cuts have not been made, and some Wall Street bigwigs have even hinted that the Federal Reserve's policy is hawkish, considering not cutting interest rates this year, or even raising interest rates once, in order to better deal with inflation.Wall Street titans believe that there may be no interest rate cuts this year, and there might even be a need for rate hikes. The significant shift in the Federal Reserve's monetary policy has had a tremendous impact on the exchange rates of Japan, the Chinese yuan, and all other countries.

Today, the yen-to-US dollar exchange rate briefly fell below 160, setting a record not seen in over 30 years. Only during the Japanese financial crisis of the 1990s was there such a painful level of devaluation.

Yen exchange rate hits 160

It's important to note that Japan itself is a developed economy, where even a weakened giant is still larger than a strong horse. However, even a country like Japan is struggling to withstand the pressure, which gives an idea of the exchange rate stress faced by other countries. Many people are asking, how is the Chinese yuan exchange rate faring?

With the United States accelerating its harvesting of Chinese assets, is it still safe?

The reason for the collapse of the Japanese exchange rate is due to deflation in the Japanese economy, forcing the yen to maintain an extremely low interest rate, which in turn leads to a significant interest rate gap between the US and Japan. China also has a similar situation to Japan.

Looking at the interest rate levels, there is a rather severe inversion in the interest rate gap between China and the US, currently at 2.27%. This means that the interest rate on a sum of money deposited in the United States is 2.27% higher than that in China.

The China-US interest rate differential still exists.

This kind of differential leads to various funds selling off the Chinese yuan and buying US dollars to earn interest in the United States. Therefore, after the US dollar index rose, the Chinese yuan exchange rate has also been sold off like the yen over the past two years. Our exchange rate has also depreciated from around 6.2 to the current level of approximately 7.25.In the same financial environment, with the same inverted interest rates, and even China experiencing a "quasi-deflation" phenomenon due to insufficient domestic demand, will the Chinese yuan experience a currency collapse like the Japanese yen?

I don't think so.

Firstly, the collapse of the yen's exchange rate is a result of Japan's long-term economic decline. In simple terms, it is because the foundation of the Japanese economy is unstable, whereas the foundation of the Chinese economy is solid.

The foundation of the Japanese economy is unstable.

Secondly, although the Chinese economy has depreciated, the extent of our depreciation is quite controllable. We have not seen a depreciation at a historical level, and many of the bearish factors are brought about by external factors, such as the China-US trade war, the China-US chip war, and the China-US financial war, among others. Many of the bearish factors are sudden.

Thirdly, the Bank of Japan is powerless to defend its exchange rate because long-term currency over-issuance has led to Japan being entangled in a debt crisis. Other countries facing exchange rate issues can choose to raise interest rates significantly to solve them.

But what about Japan? Due to the Japanese government's debt-to-GDP ratio being as high as about 220%, this means that the Bank of Japan dare not respond to exchange rate issues by raising interest rates. Because once interest rates are raised, before the yen's exchange rate collapses, the interest generated by Japan's huge debt would overwhelm Japan's national finances.

Therefore, the financial market generally believes that the Japanese Ministry of Finance and the Bank of Japan are out of options and only have short-term intervention capabilities. This also leads to international speculators' short-selling of the yen being very rampant.

The Japanese Ministry of Finance building

However, China's situation is actually completely different from Japan's. Firstly, although we have continued to lower interest rates, we still have some room for further rate cuts this year, which means that our policy space is currently very large.Secondly, China's annual trade surplus of hundreds of billions of dollars has solidified its economic foundation, which also makes its exchange rate safer than Japan's. Moreover, Japan's foreign exchange is freely flowing, providing international financial groups and speculators with more convenient channels, while China's situation is different. We have certain foreign exchange controls, and the flight of large amounts of capital is under the control of the central bank, which means that China has a strong "financial firewall."

The central bank builds China's financial firewall.

In summary, the fundamental cause of the global financial market turmoil is the "dollar tide" of the Federal Reserve, which harvests the world, and the continuous interest rate hikes by the Federal Reserve have led to the strengthening of the dollar and the weakening of exchange rates in various countries, forcing countries including China to fight the "exchange rate defense war."

Today's collapse of the Japanese exchange rate is actually a result of the "stagflation" in the U.S. economy. Because the dollar is too strong and Japan's economic foundation is weak, under the short-selling by financial giants like Soros, hedge funds frantically sell yen, causing the yen's exchange rate to plummet to around 160.

China's economic foundation is solid, which is our advantage! Although China faces external bearish factors similar to Japan, our foreign trade can really earn money. The annual trade surplus of hundreds of billions of dollars makes China's foundation very excellent, which supports the stability of the renminbi.

So you see, with the current sharp decline in the yen, many hedge funds sell Japanese assets and then turn to the Chinese market from Hong Kong, looking forward to the recovery of the Chinese stock market and asset appreciation. This is where our economy is different from Japan's.