From: Wall Street
Since the beginning of this year, the yen has gone through a long journey of depreciation under the pressure of a strong dollar.
The Bank of Japan "does nothing" and adheres to the dove position, which makes some market participants begin to discuss the possibility that the yen is facing a currency crisis.
JPMorgan Chase Japan market analyst Junya Tanase said in the latest report that the bank expects the Bank of Japan to prefer a weaker yen to successive interest rate hikes to let the yen appreciate, as the economic impact of a weak yen is likely to be net positive for Japan, mainly by improving corporate earnings, while the economic impact of successive interest rate increases will be negative on the Japanese economy. Given its preference for a weak yen, the Bank of Japan will continue to lag behind the curve and keep real policy rates negative for an extended period of time.
Further, the Tanase team said, if this assumption is correct, that is, if the Bank of Japan and the government are open to the weak yen, then the yen may depreciate itself.Cuan77slotonlineI strengthen.
The possibility of accelerating capital outflow can not be ignored.
Tanase said that Japanese households have up to 1100 trillion yen in cash deposits, and if this money is transferred to foreign exchange assets, it will have a significant impact on the exchange rate of the yen:
Over the past two years, for example, the Turkish lira has been one of the few currencies to depreciate more than the yen, with the share of household assets falling from 72 per cent to 64 per cent in the three months from the third to the fourth quarter of 2022.
If Japanese households' savings fell by 8 per cent and turned to foreign exchange assets, it would lead to a sell-off of about 90 trillion yen.
Further, Tanase explained in the report that Japan's real interest rates remain positive in a deflationary environment, which is an important factor in curbing capital outflows. However, with significant changes in the economic environment, if the yen continues to weaken, the possibility of accelerating capital outflows cannot be ignored:
In other words, Japanese households' assets are mainly denominated in yen, and portfolio rebalancing could be forced to accelerate if a weak yen leads to a crisis of confidence.
However, predicting the triggers of accelerated capital outflows and the critical level of USD / JPY remains challenging.
In addition, the Tanase notes that Japanese households have more channels to convert yen assets into foreign exchange assets, including foreign exchange deposits, foreign exchange insurance and investing in foreign exchange assets through the new NISA. If the yen sell-off coincides with large-scale purchases of foreign exchange assets by Japanese households, the selling pressure on the yen could exceed that of 1998:
According to our analysis, the weakness of the yen in 1998 was mainly caused by the selling of yen by overseas speculators rather than by Japanese investors.
Compared with the current cycle, in addition to significantly negative real interest rates in Japan and expected to remain negative for a long time, there are also more channels for households to convert yen assets into foreign exchange assets.
The main channels include foreign exchange deposits, foreign exchange insurance and investment in foreign exchange assets through the new NISA, all of which have increased in recent years.
In particular, yen selling through the new NISA is expected to be about Y6,000bn a year since the start of the year. As the IMM currency futures position shows, foreign speculators may have sold a lot of yen.
If the yen sell-off coincides with large-scale purchases of foreign exchange assets by Japanese households, the selling pressure on the yen could be greater than in 1998.
In addition, institutional investors may shift from yen assets to foreign exchange assets. The Tanase team wrote in the report:
In fact, as of the end of 2023, Japanese financial institutions held as much as 1869 trillion yen in domestic assets.
However, we should not expect a change in the 639 trillion yen held by the Bank of Japan and the 418 trillion yen held by some banks, as this reflects the demand for settlement. Therefore, the capital pool of capital outflows should be 7-800 trillion yen, far less than household savings.
Unlike households, financial institutions already hold a certain proportion of foreign assets in their portfolios, so they may have less incentive to move assets overseas.
It is worth noting that the flow of public pension funds is likely to ease the downward pressure on the yen from capital outflows next year, as the GPIF is widely expected to reduce the proportion of foreign exchange assets and increase the proportion of yen assets in the investment plan review. However, these expected changes are unlikely to ease the downward pressure on the yen.
The government may choose to impose an inflation tax on the private sector to reduce the debt burden
In addition, given that Japan's debt-to-GDP ratio is the highest in the world, at about 260%, this means that Japan is more vulnerable to higher domestic interest rates and an increased debt burden.
The Tanase team believes that even if the Bank of Japan succeeds in fighting inflation and a weak yen, the cost of victory could be huge because of the sharp rise in the cost of government interest payments.
The team predicts that the government may choose to impose an inflation tax on the private sector to reduce the debt burden:
In view of this, the government may choose to impose an inflation tax on the private sector to reduce the debt burden. According to our estimates, fiscal tightening and higher inflation will reduce the ratio of government debt to GDP to 180% by 2032.
In Japan, debtors are mainly the government and creditors are households. A long period of high inflation will cause the government to reduce its own debt, while the real value of household assets will decline.
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