Why did the yen depreciate sharply?

  The Japanese yen, a traditional safe-haven asset, unexpectedly depreciated sharply in the first half of 2022, becoming one of the worst-performing currencies in the foreign exchange market in 2022. From December 31, 2021 to July 19, 2022, the exchange rate of the yen against the US dollar will depreciate from 1 US dollar to 115.105 yen to 1 US dollar to 138.195 yen, a depreciation rate of up to 20%. On July 14, 2022, the exchange rate of the yen against the U.S. dollar briefly broke through the 139 mark, hitting its lowest level since September 1998. In other words, the current yen-dollar exchange rate has reached its lowest point in the last 24 years.
  The exchange rate of the yen against the US dollar is highly correlated with the trend of the US-Japan interest rate differential. The Fed’s interest rate hike and shrinking of its balance sheet led to a significant expansion of the US-Japan interest rate differential, which is the direct reason for the sharp depreciation of the yen against the US dollar. The underlying reason for the widening of the US-Japan interest rate gap is that, affected by the new crown pneumonia epidemic and the conflict between Russia and Ukraine, the Japanese economy is facing greater downward pressure, and the Bank of Japan has implemented a loose monetary policy to stimulate economic growth.
  The sharp depreciation of the yen has aroused the attention of the global market, but the Bank of Japan is very firm in implementing the loose monetary policy. In June 2022, the Governor of the Bank of Japan Haruhiko Kuroda reiterated the loose monetary policy stance, saying that the Bank of Japan will continue to implement the current loose monetary policy centered on the yield curve control of government bonds, aiming to firmly stimulate the Japanese economy and achieve sustainable and stable growth. to achieve the 2% inflation target. In July, the Bank of Japan announced that it will continue to adhere to the current ultra-loose monetary policy, continue to maintain short-term interest rates at a level of minus 0.1%, and maintain long-term interest rates around zero by purchasing long-term government bonds.
  At present, the market is more concerned about two issues: one is whether the Bank of Japan will temporarily change its monetary policy stance. Under the pressure of the international environment, it will follow the pace of other developed countries and adopt a tightening monetary policy; the other is the impact of the sharp depreciation of the yen.
  The author believes that, from the current situation, the Bank of Japan will not change the stance of loose monetary policy. On the one hand, stimulating economic growth is still Japan’s current main contradiction. As a large open economy, it is reasonable for the Bank of Japan to implement a loose monetary policy and to adhere to the policy-making idea of ​​”maintaining me”.
  On the other hand, the depreciation of the yen is good for the Japanese economy. The sharp depreciation of the yen is not only beneficial to Japanese exporting companies, but also encourages overseas investment companies to repatriate their profits to their home countries. In recent years, affected by the appreciation of the yen, a large number of Japanese companies have deployed their factories overseas. In the ranking of international direct investment, Japan has long been in the top three. The sharp depreciation of the yen can increase the exchange rate of overseas investment companies to repatriate their retained profits to their home countries. income.
  In addition, the term of the Bank of Japan Governor Haruhiko Kuroda will end in April 2023. With less than a year left in Kuroda’s term, the Bank of Japan is less likely to change the direction of monetary policy unless there is strong political pressure. And during the transition period when the new governor takes office, the Bank of Japan is less likely to start normalizing monetary policy immediately. The depreciation of the yen has more advantages than disadvantages for Japan’s economic growth, but the negative spillover effects brought about by the depreciation of the yen cannot be ignored. Asian countries are mostly export-oriented countries, and the depreciation of the yen will hit the economies of Asian export-oriented countries, which may lead to a competitive devaluation in the Asian currency market.
  Recently, the Fed’s steep interest rate hike and shrinking of its balance sheet have pushed the yields of long-term U.S. government bonds and the exchange rate of the U.S. dollar to continue to rise, causing emerging markets and developing countries to face massive short-term capital outflows, depreciation pressures on local currency exchange rates, falling domestic risky asset prices, and domestic economic growth. The adverse shock of a slowdown could, in severe cases, trigger currency crises, debt crises, financial crises and even economic crises.

  Because economic booms are always accompanied by financial leverage, and economic downturns are always marked by the bursting of financial bubbles, so when an economy faces downward pressure, the financial sector is always more likely to suffer from infamy and notoriety. It is regarded as the “culprit” that causes the economy to turn from the real to the virtual and then turn down. People will even develop aversion and fear of finance to a certain extent, as well as the psychology of de-financialization.
  However, history and practice have proved that financial means, as a neutral tool to assist economic operation, have penetrated into all aspects of economic and social life, and people can only adopt an attitude of seeking advantages and avoiding disadvantages, especially during economic downturns or responding to When the downward pressure on the economy is increasing, it is even more necessary to play a constructive role in financial instruments with a rational and pragmatic attitude, and solve various problems during development.
  Taking real estate as an example, the excessive expansion of some real estate developers has indeed led to financial risks, and there is no lack of financial forces to help them in the process of expansion, but this is more a problem of insufficient supervision in the early stage and excessive supervision in the later stage. If the high leverage of real estate developers is monitored in an early stage and “withdrawn” from the capital side as soon as possible, rather than just stopping the boil in stages, it will not lead to a raging fire. However, if the high leverage, high debt, and high risks in the real estate field are a foregone conclusion in the later stage, if the brakes are not slammed on the brakes, almost all financing channels will be cut off, and a more secure method will be used to clear the dammed lake of real estate investment. It will not lead to the unfinished end of the property market and the loan break in some areas.
  The development of real estate investment hunger is not only fueled by the financial sector, but also the lack of financial means. If the local bond market can be developed in a regulated and powerful manner, and local governments can raise funds from the market level through formal channels, then local governments will naturally not be so dependent on land transfer fees and various urban investment platform financing endorsed by land development. So far, after a round of “blocking the back door and opening the front door”, the regulated local bonds are still mostly issued to bank buyers, which not only squeezes a large amount of bank credit funds, but also fails to form a real market-based pricing and issuance mechanism. Moreover, as the financial resources of local governments are tight during the economic downturn, the space and time for this kind of local debts to move have begun to be tight.
  For a long time, people’s enthusiasm for real estate investment and speculation has a lot to do with the insufficient development of the financial market and the lack of abundant investment products, which has led to people’s real estate investment being more physical, which not only contributed to the real estate bubble, but also caused great damage. Waste of money. Between the overly developed U.S. real estate subprime-type financial products and the overly static Chinese-style real estate investment, there is still a lot of room for the financial sector to develop.
  Another way to cool down real estate speculation is naturally to vigorously promote the construction of affordable housing, so as to truly realize “housing without speculation”, but this is also inseparable from the participation of the financial sector and the help of financial instruments, such as real estate trust investment funds (REITs). , the Shanghai and Shenzhen stock exchanges have also issued relevant guidelines in this regard. Accelerate the decision-making and deployment related to the development of affordable rental housing, increase direct financing support, further revitalize existing assets, and actively serve the important measures to build a multi-subject supply, multi-channel guarantee, and rental and purchase housing system.
  In addition, macroeconomic growth is also inseparable from the promotion of financial markets and financial instruments. A few days ago, Premier Li Keqiang chaired an executive meeting of the State Council to deploy policy measures to continuously expand effective demand. The meeting emphasized that it is necessary to do a good job in the investment of policy development financial instruments, and believes that there is still considerable room for the release of policy effectiveness such as policy development financial instruments and special bonds, and can leverage a large amount of social funds, which must be used in a market-oriented way. In order to better play the key role of effective investment to supplement the weak board, adjust the structure, stabilize employment, bring about the comprehensive effect of consumption and economic recovery and development. The meeting also pointed out that platform enterprises should be guided to carry out inclusive financial services in compliance with laws and regulations, and to give full play to the role of the platform economy in creating employment and promoting consumption. It is also necessary to increase financial support for import and export, and actively provide enterprises with exchange rate hedging and other services.
  In addition to stabilizing growth, the realization of China’s economic transformation also has a long way to go, which is inseparable from the blessing of relevant financial instruments. The market has also specially put forward the concept of “transformation financial instruments”. The need for carbon neutrality itself to build a carbon trading market is inseparable from the help of financial tools. Carbon neutrality will also accelerate the development of E (environment, environment) S (social, society) G (governance, corporate governance) investment. The market predicts that the scale of China’s ESG investment will reach 20 trillion to 30 trillion yuan in 2025, accounting for 20% to 30% of the total scale of the asset management industry. Drawing on the development speed of global ESG public funds, we predict that the scale of China’s ESG public funds will reach about 750 billion yuan in 2025, with room for more than double the growth compared to the current scale.
  In short, China’s finance, which has faded away from its flashiness and said goodbye to the hustle and bustle, will usher in a broader development space and a more promising future.

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