Yen Plunges: Currency Collapse?
Why is the Japanese yen exchange rate collapsing, yet the Japanese government seems to be "turning a blind eye" to the crisis?
The collapse of the yen exchange rate, and the central bank's apparent indifference to the crisis?
Two months ago, with the continuous appreciation of the US dollar, a currency defense war erupted in Asia. The yen broke through the 1 US dollar: 150 yen threshold, experiencing a significant and frantic devaluation. Many Chinese people even flew to Japan specifically to snap up luxury goods.
However, just yesterday, instead of appreciating, the yen broke through the important threshold of 160 yen, reaching a new low since 1986. Japanese national wealth was plundered by US dollar capital, resulting in heavy losses.
The yen exchange rate plummeted, breaking through the 160 yen mark.
Many people wonder why, like the Chinese yuan, the yen is also impacted by the Federal Reserve's interest rate hikes, but China can withstand the crisis well, while Japan has devalued multiple times, even breaking the bottom line, thus being repeatedly harvested by the United States?
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Today, let's discuss Japan's exchange rate and monetary policy, as well as the reasons for being repeatedly harvested by the United States.
Why did the yen exchange rate collapse?
Why can't Japan withstand the United States' harvesting? The main reason lies in Japan's unique economic system.
Comparing China and Japan, China has implemented foreign exchange control measures, with an average person only allowed to use a foreign exchange quota of 50,000 US dollars per year. This means that even if the US dollar continues to appreciate, or there is a significant inversion of the interest rate difference between China and the United States, the outflow of Chinese capital remains limited and controllable.So, at critical moments, the central bank can adjust the inflow and outflow of capital by controlling the "faucet," thereby stabilizing the exchange rate market.
China's implementation of foreign exchange controls can fend off malicious capital outflows.
But does the Bank of Japan have this method? No.
Firstly, Japan itself operates under a capitalist economic system, which means that international capital is freely mobile, coming and going as it pleases, with the Bank of Japan and the government having almost no right to interfere.
Moreover, since the Plaza Accord and the collapse of the Japanese economy, the Japanese government has been forced to adopt a "negative interest rate policy," continuously lowering market interest rates, resulting in very low domestic interest rates in Japan. This has led to a consequence: yen assets have become the "safe haven" for global currencies.
What does this mean? For example, if Buffett wants to invest in the Japanese stock market, he doesn't directly exchange dollars for yen to invest, but instead uses dollars as collateral, then borrows from Japanese domestic banks, and then invests.
Buffett invests in Japan's five major trading companies.
Due to the extremely low yen exchange rate, Buffett's investment cost is also very low, and the dollar used as collateral can still earn interest. So it can be said that he is making money on both ends.
And other countries are no different; they usually use the yen as a stabilizer or a transit currency to take advantage of Japan's low interest rates, which is also why the yen has been very stable in exchange rate over the past decade or so.
However, under the influence of economic policies and the United States, the Bank of Japan lacks the ability to prevent the inflow and outflow of funds, leading to yen assets effectively becoming the "vassal" of dollar assets.After the Federal Reserve's aggressive interest rate hikes in 2022, investors have been heavily purchasing U.S. dollar assets due to the high interest rates on these assets. Currently, the U.S. federal funds rate stands at a staggering 5.33%, whereas the Japanese yen? Even after the Bank of Japan has just ended its negative interest rate policy, the maximum interest rate level is only 0.1%.
The interest rate differential between the U.S. and Japan has inverted, reaching as high as 3.31%.
Thus, the interest rate gap between the U.S. and Japan is 3.31%, which is 1.31% higher than the interest rate gap between China and the U.S.
This implies that the demand and desire for international capital to sell yen and buy U.S. dollars are much higher than for the Chinese yuan. Japan, influenced by American capitalism, has implemented a policy of free capital movement, leading to international funds coming and going as they please.
This is why we have seen the continuous devaluation of the yen and the constant appreciation of the U.S. dollar. Even assets from within Japan have played the role of accomplices to the U.S. dollar, which can be described as "reaping their own harvest."
So you see, although the direct cause of the yen's devaluation is due to the Federal Reserve's epic interest rate hikes, the current situation where the Bank of Japan is powerless to fight back is actually a result of Japan's inability to prevent funds from maliciously and significantly flowing out.
International capital is reaping the benefits, and the Bank of Japan is powerless to stop it!
This is why we see the Bank of Japan and the Japanese government holding meetings daily, expressing multiple times their intention to "step in" and curb the yen's devaluation. However, up to now, we have not seen the Japanese government implement a large-scale intervention plan.
The U.S. takes action, and Japan is included in the "monitoring list" for currency manipulation.
So, after the Federal Reserve's interest rate hikes have reaped the yen, is the U.S. satisfied? Actually, no.Just a few days ago, despite the continuous depreciation and sharp decline of the Japanese yen, the United States played a dirty trick by adding Japan to the "Currency Manipulation Monitoring List" by the U.S. Department of the Treasury.
What does this mean? To prevent the destruction of the dollar's hegemony, the United States has established three criteria. If a country meets these three criteria, the U.S. will include it in the watch list and issue a warning. What are the three criteria?
Japan is included in the "Foreign Exchange Monitoring List"
The first is that the country has a trade surplus with the United States exceeding $15 billion; the second is that the country's current account surplus exceeds 3% of GDP, and the third is that the country continuously and unilaterally intervenes in the foreign exchange market, with a net foreign currency purchase volume exceeding 2% of the country's GDP.
From the current situation, although Japan has not triggered two of the three criteria, due to the restrictions set by the United States, the Bank of Japan is only allowed to intervene in the foreign exchange market with $84.2 billion in currency intervention each year.
According to the latest report on international capital flows, in April, the Bank of Japan had already sold tens of billions of dollars in U.S. Treasury bonds, bought yen assets, and intervened in the exchange rate. Therefore, the quota left for the Bank of Japan is only about $22 billion.
The Bank of Japan sells U.S. debt to save the yen
So, you see, although Japan has more than $1 trillion in U.S. Treasury bonds, can Japan actually freely sell U.S. debt? No way, if Japan sells too much U.S. debt, the United States will label you as a "currency manipulator."
Even if you sell U.S. debt to save your country's currency, you will also be included in the "currency manipulator" and thus become a thorn in the United States' side.
For the Japanese government, due to the existence of the Japan-U.S. Security Treaty, the Japanese have actually regarded the United States as their military protector country, so does Japan dare to protest against the United States? I don't think so.The existence of the Japan-US Security Treaty has made Japan a vassal of the United States. Consequently, countries including China, Germany, Singapore, Vietnam, and now the newly added Japan, have been placed on the US foreign exchange monitoring list, becoming thorns in the US's side, which has brought instability to the yen exchange rate.
In summary, with the continuous postponement of the Federal Reserve's interest rate cut expectations, the strength of the US dollar has directly led to the devaluation of yen assets, the collapse of the Japanese currency, and the exchange rate has fallen to the level of 1986.
However, fundamentally, Japan's monetary system determines that the Bank of Japan is powerless against the flow of international capital. International capital can come and go as it pleases, causing a huge impact on Japan's domestic financial ecosystem.
Although the devaluation of the yen is beneficial for the export of Japanese companies, the downside is that yen assets are not valuable, and Japan's GDP, when settled in US dollars, is shrinking. This is actually detrimental to Japan in the long term.
The United States has had a huge impact on Japan's finance.
However, despite this, due to the "rules and regulations" set by the United States, the Japanese government, although verbally claiming to intervene in the exchange rate, really has very few cards left to play.
After all, those who can become decision-makers of a country like Japan are not simple characters. If it were not for the restraint of the United States and some international financial groups, would the Japanese government and central bank be so foolish as not to save the market? It is unlikely.
Therefore, a country's financial security is highly related to its sovereignty. Being dependent on the United States for military protection, like Japan, inevitably leads to the "fall" in the financial and political fields, being highly influenced by the will of the United States.
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