The yen fell again this week on the back of the U.S. Treasury Department's warning last week that Japan would intervene in the yen, with the USD/JPY rising above the 161 mark intraday on 28 June, sending the yen to a 38-year low.
On June 20, the U.S. Treasury Department announced that it would add Japan to its foreign exchange "watch list," expressing concern about Japan's large bilateral trade surplus and current account surplus. Although the U.S. did not label Japan as a currency manipulator this time, the U.S. government's move has actually sent a warning to Japan.
At the same time, the U.S. Treasury report also reiterates that in large, freely tradable foreign exchange markets, currency intervention should only take place in exceptional circumstances and require proper prior consultation.
Earlier, U.S. Treasury Secretary Janet Yellen also repeatedly reiterated that Japan must consult with the U.S. before intervening in the yen.
Japan's current interest rates are much lower than those in the United States and Europe, for example, the current interest rate in the United States is 5.25%-5.5%, which is significantly higher than Japan's 0-0.1%. At the same time, Japan's economic outlook is bleak, and the debt bubble is the worst in the world. Against this backdrop, the yen will continue to face significant depreciation pressure in the future.
At present, overseas capital is still shorting the yen in a variety of ways, in addition to directly shorting the yen in the foreign exchange market. Overseas capital, represented by Warren Buffett, is still issuing a large number of yen bonds, betting that the yen will fall in the future, and it will need to repay less money.
Since 2024, the issuance of yen bonds has reached a record high, which also shows the determination of overseas capital to bet on the depreciation of the yen.
Japan has also benefited from the depreciation of the yen against the dollar by more than 50% over the past 10 years.
For example, the depreciation of the yen has not only contributed to the growth of Japanese exports and the surge in the operating performance of Japanese companies, but also to the long-term balance of payments surplus, while also contributing to the growth of the Japanese economy.
In addition, Japan's few leading global industries, such as automobiles, have been able to maintain their strength in the face of competition from Chinese, South Korean, and European companies. The sharp depreciation of the yen has contributed to this.
However, as the depreciation of the yen has reached a critical tipping point, the negative impact on Japan will also increase if the depreciation continues sharply. For example, the depreciation of the yen will increase the cost of imported goods, pushing up domestic inflation and causing discontent among the Japanese public.
At the same time, the rapid unilateral depreciation of the yen will also be negative for Japan's real economy and financial markets. As a result, Japan increasingly does not want the yen to continue to fall sharply.
As a result, Japan will continue to intervene in the yen in the future, but it will be forced to continue selling US bonds in order to provide the necessary funds for the yen intervention, given that US debt holdings account for 90.5% of Japan's foreign exchange reserves.
In April 2024, Japan sold $37.5 billion in U.S. bonds to provide the funds needed to intervene in the yen.
At the same time, Japan's Central Bank of Agriculture and Forestry plans to sell more than $63 billion of U.S. and European government bonds over the next year, due to heavy losses in its holdings of U.S. bonds.
The high interest rate in the United States has put many financial investment institutions holding US bonds under huge pressure to lose money, and the delay in cutting interest rates in the United States has further increased the pressure on these institutions. It is for this reason that Japan's Central Bank of Agriculture and Forestry also announced the sale of U.S. bonds.
The Central Bank of Agriculture and Forestry was only the first bank to come forward and announce the sale of US Treasury bonds due to losses. If the Japanese government and Japanese financial institutions continue to sell US bonds aggressively, it will trigger global institutions to join the ranks of selling US bonds, forming a domino effect.
As for the United States, on the one hand, the United States does not want Japan to continue to sell US bonds on a large scale at a time when the peak of US bond issuance is approaching. This will trigger a ripple effect that will lead to volatility in the U.S. bond market, pushing up the interest cost and difficulty of issuing U.S. bonds.
On the other hand, the United States also hopes that the yen will continue to fall, which will lead to a collective decline in the currencies of Asian countries, triggering turmoil in the economies and financial markets of Asian countries, and impacting China's exports in many ways.
The United States is the country that attracts the most foreign capital, and the economic and financial market turmoil in Asian countries will trigger a rise in market risk aversion. It will help overseas capital continue to flow into the United States in large quantities, which will be good for the United States.
In recent years, the United States has attracted a large amount of foreign capital to the real economy and financial markets of the United States. According to the Federal Reserve, foreign investors now hold 60% of U.S. financial stocks, up from 45% in 2016, the highest in 70 years. In 2023, the U.S. absorbed one-third of global outbound investment, more than double the historical average.
At the same time, the U.S. dollar is a relative index, and whether it is the recent decline of the euro due to the rising risk of political turmoil in the eurozone, or the decline of the yen due to the shorting of foreign capital, it will help the dollar to remain strong against the backdrop of the Fed's failure to raise interest rates.
As a result, Japan and the United States will begin to enter a game moment, on the one hand, the United States will try to prevent Japan from selling US bonds and intervening in the yen.
On the other hand, Japan will not sit idly by and watch the yen continue to fall sharply, and will intervene in the yen again and continue to sell US bonds to fund the intervention. Recently, the authorities of Japan and South Korea have repeatedly expressed concern about a sharp fall in their currencies and vowed to defend them. On 25 June, Japan and South Korea agreed to seek ways to strengthen currency swap agreements to address the continued weakness of the yen and won.
In this context, another turmoil in Asian financial markets is inevitable, and the United States will be the beneficiary.