Editor's note: The Japanese yen exchange rate has been the focus of attention in the financial markets recently. The Japanese yen weakened to 160 against the U.S. dollar in 34 years. What does the continued weakening of the yen mean? We have invited Shengmin Wei, senior financial analyst and alternative investment fund manager, and Zhu Zhen, Senior Vice President of Futu Securities International (Hong Kong) Limited to bring their comments and analysis.
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. The Japanese yen exchange rate has been the focus of attention in the financial markets recently. The Japanese yen weakened to 160 against the U.S. dollar in 34 years. What does the continued weakening of the yen mean? Regarding this topic, we have invited Shengmin Wei, senior financial analyst and alternative investment fund manager, and Zhu Zhen, Senior Vice President of Futu Securities International (Hong Kong) Limited to bring their comments and analysis.
【Anchor】Hello. As the yen depreciation continues, the Bank of Japan (BOJ) increased the interest rate for the first time in 17 years in March. But this seems to have failed to have an intervening effect. First of all, Ms. Wei, what is the core reason behind this phenomenon?
【Wei】When the BOJ just proposed to change the interest rate policy, on maybe March 20th, I wrote an article, to remind the public to pay attention to the risk of the yen and large fluctuations in commodity prices. My idea at that time was that the yen might not appreciate, as the market expected, due to the policy changes.
Why did I say that? Because Japan is still the main buyer of U.S. bonds. What is the first thing the market will do if the yen appreciates sharply? It is to cover the huge short positions of the yen first, which are borrowings. This will certainly weaken the demand for U.S. bonds. At the same time, Yellen also made some statements about the BOJ's announcement of the change in interest policy. This is very similar to what we had expected. So I think at least until the Fed cuts the interest rate, borrowing yen to buy U.S. bonds will still be a popular trade. So the possibility of a sharp appreciation of the yen will be relatively low.
【Anchor】Okay. Mr. Zhu, what factors do you think have influenced the recent fluctuations in the Japanese yen exchange rate?
【Zhu】In fact, since the beginning of this year, speculative funds, represented by Wall Street, have gradually strengthened further short yen trading strategies. On April 10th, the yen climbed above 152.00, a key level that had held for several years. Then the speculative funds followed up on their success, continuously increasing their short positions in the yen. The main reason for the recent fluctuations is the statement made by BOJ on Friday, April 26th., which was more inclined to abandon the protection of the exchange rate. This allowed Wall Street to see the breakthrough opportunity of 160.00. So they immediately launched a rapid attack, and the yen depreciated nearly 300pips within 24 hours
【Anchor】Some market insiders believe that BOJ has started to intervene in the exchange rate. What do you think about this? Under what circumstances do you think the BOJ would normally intervene?
【Zhu】In fact, from September to November 2022, the BOJ intervened in the foreign exchange market once. Since then there has been a tacit rule in Japan's foreign exchange market, that if the yen depreciates rapidly by more than 200pips in 24 hours, the BOJ will intervene. Last Friday's exchange rate fluctuations obviously have reached that sore point.
From the dollar-yen fluctuations in the afternoon of April 29th, all the exchange industry insiders could tell that only the BOJ was capable of doing this. So the answer is yes, BOJ must have intervened. In the past few days, the Japanese media have also reported the exact amount of money spent. So BOJ was definitely involved in this intervention, and the actual amount will be available at the end of May. However, from the figures released by the media, it is estimated to be similar to the amount used during the intervention in 2022.
【Anchor】Alright. Ms. Wei, in your opinion, will the weakening of yen continue for a long time? Under what circumstances would the BOJ have the incentive to intervene in the yen again?
【Wei】Whether the yen was at 120 or 150 against the U.S. dollar or weakened to 157 now, BOJ's stance has been very weak. They are still very ambiguous about the goal of interest rate hikes. Basically, there is no outlook given for the interest rate hikes. As we can see, Japan Tokyo's Core CPI for April was only 1.6%, well below the central bank's previous target of 2%. What's more, the latest US CPI is still high, which means the BOJ knows that the Fed's interest rate will remain unchanged in May. These suggest that the BOJ will not intervene the market significantly in the near future.
On the other hand, the depreciation is caused by the BOJ itself, but the speed of depreciation may not be what the BOJ wanted, at least not the sharp weakening of the yen from 150 to 160. This sharp depreciation should be related to the sudden surge in international hedge funds' short positions. We can see from the CFTC data released at the beginning of this week that the net short yen position increased to more than 170,000 contracts, the largest net short position in the global foreign exchange market. These illustrated that the speed (of depreciation) was controlled by them. But the shorts, maybe when the yen is 160 against the U.S. dollar, we think they'll be scrambling to close the positions. This may bring the yen back up from 160 to 157 against the U.S. dollar in the short term, as the pressure is there.
【Anchor】Yes, we can see that the yen exchange rate has indeed retreated to 155 or 156 against the U.S. dollar. Does this mean that the closing of the positions that you mentioned has already taken place?
【Wei】Yes, I think it has already happened, because we saw that these short sellers have been unwinding their positions. They wouldn't want to start again another large-scale short of the yen.
【Anchor】Mr. Zhu, how do you assess the overall impact of the depreciation of the yen? Will China be affected by the exchange rate fluctuations
【Zhu】I think that the depreciation of the yen is a mixed blessing for the Japanese economy. The recent fluctuations in the foreign exchange market will not transmit to the real economy in Japan immediately. This intervention of the yen is mainly affecting the sentiment of the market. As we know, the yen is the main currency for the carry trade. The shorts will hold large yen short positions and earn the interest rate spread. But if the daily volatility of the yen exchange rate increases significantly, the risk of carry trade will become very high, and the stability of holding the short position will be reduced. So I think this intervention will definitely produce some subtle psychological changes in the short-sellers' minds. On the other hand, for China, the impact of the yen's fluctuations on RMB is very limited. On the contrary, we should be more concerned about the depreciation of other Asian currencies and the economic situation
【Anchor】Alright. We see that the depreciation of the yen is good for Japan's exports and tourism. But at the same time, the depreciation of the yen will put a burden on its imports, especially on local consumers. Ms. Wei, how do you assess the impact of the depreciation of the yen on the Japanese economy?
【Wei】In my opinion, if the Japanese yen depreciates sharply to more than 155 against the U.S. dollar, there will be more harm than good to the Japanese economy. At around 155 against U.S. dollar, the impact on their exports may not be too bad. But if higher than this level, the increase in their exports may not be able to offset the impact of the significant increase in the costs of imports. If import costs increase significantly and persist in the long term, there is actually pressure for the yen to appreciate. That is to say, their internal CPI will be much higher than what was expected, essentially forcing the BOJ to raise interest rates. So I think at 158 against the U.S. dollar, the continuation of the short of the yen is not what the hedge funds want to see.
If the yen depreciates significantly, the costs will be too high for Japan's internal economy to sustain. Although the yen has maintained at 155 against the U.S. dollar for a while, Japan's April CPI was not significantly higher than expected, but still low. This is acceptable for the BOJ. But if the yen continues to depreciate or depreciate suddenly, it will definitely have a significant impact.
【Anchor】Okay, Mr. Zhu, what do you think about the future trend of the yen? How should investors cope with the exchange rate risk?
【Zhu】Powell also made a relatively dovish speech on Thursday morning. I think he slightly eased the pressure of the depreciation of the yen, and it may be that Japan and the U.S. have communicated and negotiated in advance. But we still need to pay attention to the market. I don't think the battle between the long and short of the yen is over. In the short term, I think the closing price of 156.35 on Monday the 29th is very important, and will probably become a watershed for the trend of yen strength or weakness. If the closing price going forward is below 156.35, then we can say that BOJ's intervention is very effective. For investors, especially Hong Kong investors, the impact of yen fluctuations on investment returns is much greater than that of Hong Kong and U.S. stocks. Therefore, when investing in Japanese stocks, we must skillfully use some Japanese yen futures or leveraged FX contracts for hedging.
【Anchor】Yes. We see that the Fed has held the benchmark interest rates unchanged for the sixth straight meeting, still at the 23-year high mark. Ms. Wei, will this put further pressure on the yen?
【Wei】The U.S. is not only putting pressure on the yen but on many other currencies. The most important thing is whether the Fed will cut interest rates or not, or at most only once. The main reason is that the Fed knows substantial interest rate reduction may cause a significant rebound and put pressure on inflation, which they took great effort to keep under control. At the same time, the Fed chair signaled at the end of last year that interest rates would remain "higher for longer". We think that this year or next year, or even the year after, the Fed's interest rate will remain at a relatively high level, around 4% to 4.5%. In this case, there's a lot of pressure on other currencies to depreciate.
【Anchor】Will the so-called Asian currency "depreciation wave" emerge?
【Wei】In fact, the Fed's decision not to cut interest rates reflects that it still wants to keep the dollar strong against other currencies. At the same time, the pressure on the Asian currencies, especially on some countries that have relatively small economies, is still very heavy. Whether the "depreciation wave" will emerge depends on what happens to the internal core CPI of each country's economy after the currency has depreciated significantly. If these countries can hold on, their currencies may not continue to depreciate significantly. But if the internal costs of the economy rise sharply as a result of the pressure from its currency depreciation, the central banks of these countries will take some action.
The question is not whether this would happen, as currency depreciation is already happening, but how long Japan can hold on. Of course, if the US announces to cut interest rates before the end of this year, Asian countries will then have some breathing room.
【Anchor】Alright. Mr. Zhu, do you think there will be a "depreciation wave"?
【Zhu】I think we can take a step back and see from a macro perspective, The U.S. capital represented by Wall Street, in my opinion, does not want Japan to be in too bad a situation. Therefore, the depreciation of the yen has reached a limit, and the possibility of further depreciation is very small. This is the first point.
Second, the depreciation of other Asian currencies is mainly due to the US dollar, as the Fed keeps pushing back the timing of interest rate cuts. On Thursday, Powell made some dovish and moderate remarks. This eased the depreciation pressure on the currencies of these Southeast Asian countries to some extent. So personally I think that the risk of currency depreciations in Asia is still manageable.
【Anchor】Lastly, Ms. Wei, against the backdrop of the general pressure on Asian currencies, how do you see the trend of RMB?
【Wei】RMB on the other hand, has been relatively stable this year, despite the sharp depreciation of other Asian currencies. The main thing is that China's internal economy has stabilized. If the U.S. cuts interest rates once at the end of the year, and China's economic growth can still be maintained at above 5%, the RMB should still be relatively stable, compared with other Asian currencies.
【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
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