21st Century Business Herald reporter Chen Zhi Shanghai reported that the pace of the Fed's interest rate hikes is soaring, and Kuroda Higashihiko has died of doves.
As of 18:00 on April 20, the dollar/yen was hovering near 128.05, hitting its highest intraday value since 2002 at 129.4; this means that the yen exchange rate once fell to the lowest value in the past 20 years, becoming the worst-performing G10 currency this year.
Datayes data shows that the cumulative decline of the yen against the US dollar since the beginning of last year has reached about 30%.
Wall Street traders have flocked to the camp of short yen arbitrage. According to the latest data released by the U.S. Commodity Futures Trading Commission (CFTC), as of April 12, speculators held net short positions in the yen that had reached the highest value in the past three and a half years.
The reporter learned from many sources that an important reason for the sharp decline in the yen is the sharp divergence of monetary policy in the United States and Japan - compared with the Federal Reserve to accelerate the pace of interest rate hikes, the Bank of Japan still maintains an extremely loose monetary policy, which has triggered investment institutions to bet on the sharp decline in the exchange rate of the yen against the US dollar.
"Previously, the market expected that the Bank of Japan might intervene in the currency market to support the yen, but as the Bank of Japan stressed that it would still buy Japanese government bonds in unlimited amounts at fixed interest rates, the market's expectations for the Bank of Japan's intervention in the foreign exchange market were completely disappointed, triggering a larger wave of short selling of yens." A Wall Street hedge fund manager told reporters.
Ataru Okumura, a strategist at SMBC Nikko Securities, said the BOJ move showed that it was strengthening its firm commitment to ultra-loose monetary policy and limiting the rise in Japanese government yields through a new round of unplanned QE bond purchases.
"In fact, what really triggered the yen's sharp fall was the yen spread trading capital." A Forex broker revealed to reporters. As U.S. Treasury yields continue to soar, the U.S.-Japan Treasury yield gap continues to widen, and more and more Japanese carry-on trading capital is borrowing yen and then converting dollars to invest in U.S. Treasuries (arbitrage higher risk-free spread returns), which has led to a sustained acceleration in the decline of the yen against the dollar.
It is worth noting that the sharp decline in the yen has also greatly reduced the characteristics of its traditional safe-haven currency.
A chief representative of a large European asset management institution in the Asia-Pacific region told reporters that the market is currently paying close attention to whether the sharp decline in the yen exchange rate will lead to the bank of Japan's monetary policy turn, if the Japanese economic recovery continues to suffer twists and turns, more and more large asset management institutions may reduce the proportion of yen assets in reserve assets.
Who is selling the yen in a big way
The sharp decline in the yen's exchange rate began in early March.
"At that time, the market was very confused, and the escalation of the Conflict between Russia and Ukraine led to a sharp decline in the market's investment risk appetite, which should be good for the yen, but the yen did not rise but fell." The above-mentioned Wall Street hedge fund manager said that at first, many investment institutions blamed the decline in the yen on the rising expectations of a sharp interest rate hike in the US dollar, which made the US dollar index rise sharply, dragging the yen exchange rate passively down.
But they soon discovered that things weren't that simple.
"At present, the biggest driving force behind the sharp decline in the yen is the trading capital of the yen spread." He pointed out. Specifically, as the Fed's sharp interest rate hike expectations have heated up us Treasury yields and the US-Japan Treasury spread continues to widen, more and more Japanese investment institutions (including a large number of insurance companies) have borrowed the yen into the US dollar and invested in US bonds to earn higher risk-free spread returns, resulting in a continuous rapid decline in the yen against the US dollar.
As of 18:00 on the 20th, the 10-year US Treasury yield hit a yearly high point - near 2.956%.
"Even after deducting the financing costs of spread transactions and the cost of risk hedging, the comprehensive return rate of Japanese investors investing in 10-year US Treasuries is still as high as 1.7%, while the actual return rate of Japanese Government bonds in the same period is only 1/7 of the former." The above-mentioned Forex broker revealed to reporters. Today, these yen spread trading capitals realize that more and more Japanese investment institutions are joining the arbitrage operation of borrowing yen to buy US bonds, and they are more unscrupulous to short yen arbitrage.
In his view, the biggest confidence of the yen spread trading capital dares to sell yen arbitrage in a big way is that they are sure that the Bank of Japan will not easily intervene in the foreign exchange market - although Bank of Japan Governor Kuroda Toshihiko said that the current attitude of the Bank of Japan to the depreciation of the yen is gradually shifting from "increasing concern" to "rising concerns", the Japanese government still emphasizes that the monetary policy of the Bank of Japan should aim to maintain the Japanese inflation rate to reach 2%, not to manipulate the yen pair.
"This has made investment institutions realize that the current monetary policy focus of the Bank of Japan will still focus on promoting economic recovery, rather than controlling inflation and stabilizing the yen exchange rate." The Forex broker said.
The "Pain Threshold" of the Japanese Economy
It is worth noting that a series of economic data have shown that the depreciation of the yen is having an increasingly significant impact on Japan's economic recovery. In fiscal year 2021 as of March, the yen-denominated import price rose by 32.7% year-on-year, and the export price rose by 12.3% year-on-year, leaving Japan's foreign trade in deficit of 5,374.8 billion yen.
According to the Japanese media survey, more than 3/4 of Japanese companies have said that the decline in the yen exchange rate has adversely affected their business, and about 31% of the companies surveyed believe that the fall of the yen exchange rate below 125 is their "pain threshold".
The International Monetary Fund issued a review report on the Japanese economy, pointing out that due to the sharp depreciation of the yen, the IMF has lowered japan's economic growth forecast this year from 3.3% to 2.4%, and the Japanese economy is facing major downside risks.
Japan's Chief Cabinet Secretary Hiroichi Matsuno said that if the yen exchange rate accelerates, it will cause the price of imported products to rise, which will have a negative impact on Japan's economic prosperity and consumer market.
"Considering that Japan has maintained a foreign trade surplus for a long time, if the yen exchange rate continues to depreciate, resulting in soaring energy import prices and a sustained deficit in foreign trade, it will trigger speculative capital to continue to increase the short position of the yen and bet on the further sharp decline of the yen exchange rate." The above-mentioned foreign exchange broker pointed out that unless the Bank of Japan quickly adjusts its accommodative monetary policy and intervenes in the currency market in time, the yen will soon fall below 138.
Why the characteristics of safe-haven currencies are lost
In the eyes of industry insiders, the sharp decline of the yen has also made its safe-haven currency characteristics almost "disappear".
"We have significantly reduced our yen position in our safe-haven portfolios due to the sharp decline in the yen." The chief representative of the Asia-Pacific region of the above-mentioned large European asset management institutions revealed to reporters.
The reporter learned from many sources that there are not a few overseas large asset management institutions that adopt similar strategies, and some investment institutions have "replaced" by increasing their RMB positions.
In his view, a key factor in the "loss" of the yen's safe-haven currency characteristics is the "reverse outflow" of trading capital for the yen spread. In the past, when the global financial market suffered sharp fluctuations and declines, the global yen spread trading capital has taken deleveraging and bag-safe measures, which has caused a large number of yen to return to Japan, pushing up the demand for the yen and the exchange rate of the yen, making the yen show a very high safe-haven currency characteristic. Today, the continuous soaring US Treasury yields have attracted a large number of Japanese investment institutions to borrow yen to invest in US bonds, resulting in the yen spread capital not only did not escalate with the Escalation of the Russian-Ukrainian conflict, but flowed to the US bond market with greater force, causing the yen exchange rate to fall sharply.
"The deep-seated reason for the reverse outflow of capital from the yen spread trading is the sharp divergence of Monetary Policy between Japan and the United States. As the Bank of Japan maintains a very low interest rate policy and implements quantitative monetary policy, the yield of Japanese government bonds continues to be low and the cost of financing yen borrowing is extremely low, attracting Japanese investment institutions to adopt a bolder and more aggressive strategy to borrow yen and invest in US bonds to earn higher risk-free returns. The chief representative of the Asia-Pacific region of the above-mentioned large European asset management institution pointed out.
A number of Wall Street hedge fund managers told reporters bluntly that unless the Bank of Japan adjusts monetary policy and intervenes in the foreign exchange market to promote the return of yen spread trading capital, it will be difficult for the yen exchange rate to reverse the decline.
"At present, as Japan's monetary policy runs counter to other Western countries, and the Japanese economy is increasingly affected by the depreciation of the yen, more and more global investment institutions regard the yen as a new risk currency, no longer a traditional safe-haven currency." A Wall Street multi-strategy hedge fund manager told reporters bluntly that this will undoubtedly force many of the world's largest asset managers to reduce the proportion of the yen in their reserve assets as a new safe-haven investment strategy.
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