Recently, the US dollar has risen sharply, which has led to a sharp rise in the exchange rates of various countries, but the yen has been unusually sluggish. This phenomenon makes people wonder, does the Bank of Japan intend to go along with the dollar and cooperate with the dollar to harvest itself?Many people mistakenly believe that the appreciation of the dollar is the reason for the depreciation of the yen, but reality has shown us that the problem is not simple. Since November, the U.S. dollar index has fallen off a cliff**, while other currencies have sharply**, such as the offshore exchange rate of the renminbi by 2,000 points, and the pound and the euro have also fallen by 3%. However, the yen exchange rate only returned to within 150, contrary to the previous ** of economists. In fact, the yen has accumulated 14% since the beginning of this year, which is 139% after further **. This fully shows that in addition to the impact of the interest rate differential between the US dollar and the yen, there are other larger factors affecting the yen exchange rate, which is closely related to the Japanese economy.
Recently, the Japanese economy has made progress on a number of fronts. The first is the Bank of Japan's continued stimulus policy, which has driven the obvious increase in inflation, which has broken the deflationary dilemma that Japan has been facing for a long time. The latest data showed that core inflation reached 29%。In order to maintain the level of inflation, the Bank of Japan has been slow to raise interest rates, and this strategy is gradually being realized. Secondly, with the gradual recovery of tourism after the pandemic, the number of Japanese tourists has increased significantly. Arrivals reached 2.52 million in October alone, surpassing pre-pandemic levels, which further compensated for the lack of domestic consumption. However, the negative impact of the decline in Japan's domestic consumption power is likely to be even greater. On the one hand, the real purchasing power has been declining due to the continuous price increases, and on the other hand, the real wages of the people have also continued to decline year-on-year. In addition, Japan's exports are also an important driver of economic growth, but they fell year-on-year in the first three quarters of this year. The combination of multiple factors led to Japan's GDP growth rate turning negative in the third quarter of this year, equivalent to an annualized rate of 21%, compared to the market's previous estimate of **04% is even less optimistic.
At present, the problem facing the Bank of Japan is that it must face reality and make adjustments. At the beginning of this year, the Bank of Japan changed its position, and the new governor Kazuo Ueda should have taken measures earlier, but surprisingly, he almost copied the original monetary easing policy and insisted on not raising interest rates, resulting in a continued sharp depreciation of the yen. In 2016, when the yen was sharply **, the previous governor took three rescue actions, but the current governor did not carry out any rescue actions after the yen fell below 150 again. Even more confusing is the fact that Japan even bought US bonds in the first three months, contrary to the previous practice of supporting the yen by selling US bonds. Fortunately, however, in the latest monthly report, Japan corrected its mistake in time and rejoined the sell-off in US bonds. However, data from Japan's Ministry of Finance show that at the same time, private funds are buying U.S. bonds and flowing out of the country's financial markets. This massive withdrawal of funds is likely a hint at a bearish attitude of Japanese investors about the future of the domestic economy. At the moment, Japanese economists expect the Bank of Japan to end negative interest rates next year as high as 85%, up from 52% in September. If interest rates are raised from next year and return to positive, this will likely significantly increase the yen exchange rate. It also depends on the decision of the Bank of Japan. If the Bank of Japan is determined to bring real interest rates back to positive territory, i.e., nominal interest rates exceed inflation, then at least a 250 basis point hike will be needed. At that time, the interest rate differential with the dollar will be significantly reduced, or even reversed due to a sharp rate cut by the dollar. If this is the case, the yen will appreciate sharply, and it may even lead to a further increase in the US dollar**. What will the Bank of Japan decide?Will it fight back against the dollar, or will it get into trouble with the dollar?It is still worth watching for the future.
By analysing the exchange rate and changes in the Japanese economy, we can see the huge challenges that the Bank of Japan is currently facing and the adjustments that need to be made. Although the Japanese economy has shown positive changes in some aspects, it still faces multiple problems, such as a decline in spending power due to inflation and a decline in exports. The Bank of Japan needs to face the reality and make appropriate adjustments to promote sustainable economic development. The future direction of the yen exchange rate will depend on the decision of the Bank of Japan, especially on whether to end the negative interest rate policy and raise interest rates. In any case, the market still needs to pay close attention to the development of the Japanese economy and the dynamics of the exchange rate.