Preamble:
In the currency war, the yen depreciated like a waterfall, falling below the 160 mark, which was not only a fluctuation in the exchange rate, but also an economic war without the smoke of gunpowder. The Bank of Japan tried to turn the tide by injecting 9.8 trillion yen into the bailout, however, the shot in the arm failed to stop the yen from falling into free fall. The economic repression of the United States was like a sword of Damocles hanging over Japan's head, and the exchange rate policy became a lethal weapon in this war.
1. The collapse of the yen: a loss in the currency war
The U.S. warning is like a sharp blade in the cold wind, pointing to Japan not to directly intervene in the exchange rate. In this situation, the Bank of Japan is walking on thin ice, and every step needs to be cautious. The pressure from the United States is not only a test for the Japanese economy, but also a direct challenge to Japan's monetary policy. The Bank of Japan was completely defeated in this currency war, and the depreciation of the yen became a clear proof of its defeat.
This currency war is not without its winners. The depreciation of the yen may be a double-edged sword for the export-oriented Japanese economy. On the one hand, depreciation has increased the competitiveness of exports, and on the other hand, it has brought imported inflationary pressures. The defeat of the Bank of Japan in this battle not only exposes its limitations in international economic policy, but also reveals the helplessness and struggle of central banks in the global currency war.
2. Interest rate hike: Japan's helpless choice
In the smoke of the currency war, the Bank of Japan seems to be at a crossroads. Raising interest rates, once a distant option, is now the focus of heated discussions. The specter of inflation is looming around the corners of the economy, eroding the very foundations of the Japanese economy, forcing the Bank of Japan to re-examine a policy that it once avoided it.
The rise in inflation is like an invisible pressure squeezing the Bank of Japan. Core inflation quietly rose to 2.5% in May, up from 2.2% previously. Although this figure seems modest on a global scale, it is a signal that cannot be ignored for Japan, which has been mired in deflation for a long time. The rise in inflation has made the need for interest rate hikes begin to emerge.
Within the Bank of Japan, there is a clear divergence of views on raising interest rates. Some members believe that raising interest rates is necessary to curb inflation and stabilize the economy. They fear that if no action is taken, the flame of inflation could spread and eventually spiral out of control. Others, however, are cautious, fearing that rate hikes could stifle the fragile economic recovery and even push Japan into the abyss of deflation once again.
Raising interest rates, a seemingly simple decision, is fraught with complexity and uncertainty. Bank of Japan Governor Haruhiko Kuroda said at a conference: "We must take into account a combination of factors, including the sustainability of the economic recovery, the direction of inflation, and changes in the external economic environment." This sentence shows the Bank of Japan's entanglement and helplessness on the issue of raising interest rates.
The pros and cons of raising interest rates are like the two ends of the scale, swinging. On the one hand, interest rate hikes can curb inflation and stabilize the exchange rate, but on the other hand, they may increase the debt burden and curb economic growth. The Bank of Japan must find a balance between the two, and this is undoubtedly a difficult choice.
The Bank of Japan's discussion of interest rate hikes is not only a response to the current economic situation, but also a prediction of the future direction of the economy. This discussion is not only about the future of the Japanese economy, but also may become a bellwether for global monetary policy. Interest rate hikes, once an unfamiliar term, are now a challenge that the Bank of Japan has to face.
3. Debt stress: a double-edged sword for raising interest rates
In the chess game of monetary policy, raising interest rates seems to be a good move, but there are huge risks hidden behind it. Japan's huge debt burden is like a sword of Damocles hanging over its head, and the decision to raise interest rates may be the last straw that touches the hilt of the sword.
Japan's long-standing reliance on zero and negative interest rates has been a sweet poison to the government's debt. Today, Japan's total debt has reached alarming levels, and the idea of raising interest rates has been felt as soon as the interest rate on the debt is being paid.
The lesson of raising interest rates in the United States is at hand. In a greenhouse of zero interest rates, the size of the US national debt is constantly ballooning, and it seems carefree. But as the Fed raised interest rates to 5.2%, Treasury yields rose with it, with annual interest payments surging from $300 billion to $1.2 trillion. Such drastic changes have undoubtedly sounded the alarm for Japan.
Interest rate hikes are a double-edged sword for Japan. On the one hand, interest rate hikes can curb inflation and stabilize the economy; On the other hand, it may make the huge debt interest expenses the last straw that crushes the economy. The Bank of Japan must find a balance between the two, and this is undoubtedly a difficult choice.
Opinions on raising interest rates within the Bank of Japan are sharply divided. Some members believe that raising interest rates is necessary to curb inflation and stabilize the economy. They fear that if no action is taken, the flame of inflation could spread and eventually spiral out of control. Others, however, are cautious, fearing that rate hikes could stifle the fragile economic recovery and even push Japan into the abyss of deflation once again.
Bank of Japan Governor Haruhiko Kuroda said at a conference: "We must take into account a combination of factors, including the sustainability of the economic recovery, the direction of inflation, and changes in the external economic environment." This sentence shows the Bank of Japan's entanglement and helplessness on the issue of raising interest rates.
4. Diversifying Foreign Exchange Reserves: Another Way for Japan
When the shadow of interest rate hikes loomed over the Japanese economy, the Bank of Japan began to look for another way: diversifying its foreign exchange reserves. This path may provide a glimmer of hope for Japan's economic recovery.
The seemingly aggressive sell-off of U.S. bonds could become a trump card for the Bank of Japan. Japan's holdings of U.S. bonds are as high as 1.15 trillion U.S. dollars, and such a huge amount makes every move in the foreign exchange market by Japan affect the nerves of the world. The sell-off of U.S. bonds can not only bring diversified foreign exchange reserves to Japan, but also depress the dollar index to a certain extent, helping the yen rebound.
The diversification of Japan's foreign exchange reserves has not been without its challenges. In this process, Japan will have to face challenges from many sides. How to achieve a smooth transition of foreign exchange reserves without causing market turmoil is a problem that the Bank of Japan must solve.
Epilogue:
In this process, private companies and households also play an important role. Their investment decisions will not only affect the diversification of Japan's foreign exchange reserves, but may also become an important force in the movement of the yen's exchange rate. The Bank of Japan needs to work with private companies and households to diversify its foreign exchange reserves.