#美联储维持利率不变 “The yen is undervalued,” and the pressure from rate hikes may increase
The yen is at historic lows, mainly because the interest rate set by the Bank of Japan is far below that of other major economies such as the United States. This greatly reduces the yen’s appeal to international investors. A weak yen helps support Japan’s export-led economy, but when it comes to imported goods such as oil, currency depreciation also harms Japan’s economy. Because oil trades in international markets are usually priced in US dollars, Japan not only has to deal with oil prices rising in recent months, but also must pay more yen to buy that oil. As the US dollar strengthens sharply, the yen falls significantly alongside many other Asian currencies. Since April, Japan’s Ministry of Finance has spent several hundred million dollars buying yen to prop up the exchange rate, but with little effect. On the 3rd, Kazuya Koyama said that given the Japanese government’s success in revitalizing the economy, the government believes the yen exchange rate is undervalued. On July 30, Bessent, in an interview with Fox News, said: “The yen is severely undervalued and is at extremely low levels.” He emphasized that the yen exchange rate fails to reflect policy fundamentals. The next day, he posted on the social platform X: “I’m looking forward very much to meeting with Bank of Japan Governor Kazuo Ueda at the G20 finance ministers and central bank governors meeting at the end of August.” Bessent believes that the lag in Bank of Japan rate hikes is the background reason for yen depreciation. The Bank of Japan will hold its next meeting to decide monetary policy in September, and pressure from rate hikes is likely to further increase. At the monetary policy meeting held on July 31, the Bank of Japan decided to keep the policy rate unchanged at 1%. At the press conference, Kazuo Ueda emphasized: “If we believe the monetary environment is too accommodative, we may speed up the pace of rate hikes.” He also said that the Bank of Japan is aware that risks of rising prices are increasing. Of note, although the joint intervention between Japan and the US in the FX market makes the yen rise quickly, market concerns about further intervention or countermeasures are growing. Moreover, problems brought about by Japan’s domestic economic policies also keep the market on guard. On July 30, Sanae Takaichi announced that the food consumption tax rate will be cut to 1% in April 2027, and the remaining 1% will be covered through cash subsidies, making the burden “effectively zero.” However, this policy will result in an annual tax revenue loss of about 50 trillion yen, and the issue of how to raise funds remains unresolved. Meanwhile, in the estimate request for the 2027 fiscal year budget, there is no upper limit on the申报 amounts for growth-oriented investments and crisis management investments. The market is full of concerns about issuing additional government bonds, and joint intervention may be little help.
A warning from lessons learned 28 years ago
On the 2nd, Trump described this Japan-US joint FX intervention as “a symbol of friendship.” On an interview with reporters, Kazuya Koyama on the 3rd explained: “Through economic security between the US and Japan, this will strengthen the two countries’ unbreakable alliance.”
“The reason the US agreed to participate in this coordinated intervention is because it aligns with its national interests, allowing it to exchange a very low cost for enormous potential benefits.”
Shigeto Nagai, head of Japan economics at Oxford Economics, told the BBC that he expects the two countries to continue “intermittently implementing coordinated intervention” for some time. Even if the actual intervention amounts are not particularly large, maintaining vigilance about intervention continuously will effectively deter speculators. But joint intervention is a double-edged sword. If the intervention is too aggressive and causes the yen to surge out of control in a short period, global yen carry trade positions worth tens of trillions of dollars would unwind in disorderly stampedes, leading to concentrated discounts of assets such as US Treasuries and US stocks, and thereby triggering a global liquidity tightening. There have been lessons like this in history.
In 1998, 28 years ago, Japan kept ultra-low interest rates, and global capital borrowed heavily low-interest yen and poured into high-yield assets, forming a massive yen carry trade. That year in June, the US and Japan jointly bought yen to intervene in the FX market and stop the yen from continuing to depreciate. Two months later, Russia’s debt default sparked a surge in global risk-avoidance sentiment; carry-trade assets suffered large losses, and margin call notices forced institutions to sell assets and frantically buy yen to repay debts, causing the carry trade to reverse chaotically. The yen rose against the dollar by 20% in just two days. This dramatic reversal directly pushed the highly leveraged hedge fund giant LTCM to the brink of bankruptcy, forcing the US Federal Reserve to urgently organize a bailout involving 14 Wall Street banks to inject capital and take over—only then was a systemic collapse of the global financial system avoided. Whether this Japan-US joint intervention can truly stabilize exchange rates and avoid the market falling into another vicious cycle of carry-trade reversals remains to be seen.
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