How does the exchange rate change when the yen appreciates?

As the sovereign currency of Japan, the Japanese yen has a unique exchange rate analysis framework because of its huge financial market scale and special monetary and fiscal policies. This paper will follow the historical footsteps and try to find clues about the change of the yen exchange rate from the historical trend of the yen.

First, the trade-led yen fluctuates in equilibrium.

After rapid development in the 1960s and 1970s, Japan had become the second largest economy in the world by the early 1970s. Because Japan's foreign trade is highly developed, the exchange rate of the Japanese yen was highly correlated with Japan's trade situation in the 1970s.

1979- 1980, the second oil crisis broke out and oil prices soared, which led to a sharp rise in the inflation rate in the United States. In order to combat high inflation, the United States has substantially raised its benchmark interest rate and kept it in double digits for a long time.

The high yield attracted a large amount of overseas funds to flow into the United States, which led to the unilateral appreciation of the dollar. From 1979 to 1984, the US dollar index rose from less than 89 to more than 15 1, with an appreciation rate of nearly 70%. Due to the sharp rise of the US dollar index, although Japan's trade balance keeps rising, the yen exchange rate remains relatively stable.

Second, the Plaza Accord kicked off the appreciation of the yen.

After entering the 1980s, due to Japan's perennial trade surplus, the friction between Japan and the United States began to increase, and the United States was extremely dissatisfied with the decline of the yen exchange rate. Therefore,1September 1985, the United States, Japan, Britain, France and Germany signed an agreement in new york Plazz Hotel and unanimously decided to jointly intervene in the foreign exchange market. The yen and the mark should appreciate sharply to save the overvalued dollar price.

After the signing of the agreement, the dollar depreciated sharply against the above four currencies due to government intervention and a large number of selling by market participants.

Japan, as an export-oriented economy, was called "yen appreciation depression" at the beginning of 1985, because of the sharp appreciation of the yen, its exports suffered a certain impact and its economy experienced a short recession. In order to prevent the appreciation of the local currency from adversely affecting the country's economic growth, the Bank of Japan has formulated a series of easing policies to stimulate economic growth.

However, due to strong external demand and strong competitiveness of Japanese industrial products, Japan's foreign trade will always maintain a large surplus in the next decade. During this period, although Japan experienced the boom and bust of the bubble, the large surplus under the current account always promoted the appreciation of the yen.

1at the beginning of 995, a large number of overseas funds returned after the Hanshin earthquake in Japan, which led to the rapid appreciation of the yen to around 80.

Third, in the era of low interest rates, carry trade dominates the yen exchange rate.

The Great Hanshin Earthquake caused economic losses of more than $654.38+000 billion to Japan, which was tantamount to adding insult to injury to Japan after the bubble burst in the early 1990s. In order to boost the domestic economy, the Bank of Japan further lowered interest rates. As the spread between the United States and Japan widened, the yen carry trade began to rise.

In carry trade, you borrow a lot of yen as a liability, then sell it and invest it in overseas high-yield assets such as US debt. It can be seen that since Japan entered the era of low interest rate (including zero interest rate and negative interest rate), carry trade has become the most important factor affecting the yen exchange rate. In most of the time, the yen exchange rate is highly correlated with the spread between the United States and Japan.

At the same time, when emerging markets are booming, yen liabilities are also invested heavily in emerging markets to obtain high returns. When a risk event or economic crisis broke out and relatively fragile emerging markets were hit, a large number of carry trades flowing from Japan into emerging markets were closed, which made the yen appreciate and became a "safe haven currency".

1997- 1999 during the Asian financial crisis, although the spread between the United States and Japan was high, the yen appreciated sharply, and the "safe haven mode" was tried for the first time. After the financial crisis in 2008, the spread between the United States and Japan narrowed, and the impact of the global economic downturn was superimposed. The yen once again stepped out of the magnificent appreciation market.

Figure 1 US-Japan spread and Japanese yen exchange rate

4. The influence of import and export on the yen exchange rate still exists.

In the analysis of yen exchange rate, carry trade (US-Japan spread) is not the only determinant of yen. It can be seen that during the period from 20 13 to 20 15, although the spread between the United States and Japan remained low, the yen went out of the unilateral depreciation trend, and the exchange rate of the yen obviously deviated from the spread between the United States and Japan.

During the period of 20 13-20 15, Japan's industrial chain was damaged after the 201/kloc-0 Great East Japan Earthquake, and its exports declined, resulting in a deficit in Japan's import and export surplus that lasted for more than 30 years. Subsequently, due to the continuous fermentation caused by the Fukushima nuclear power plant leakage accident, most nuclear power plants in Japan were forced to shut down. In order to make up for the power shortage, Japan had to import a lot of fossil fuels to restart thermal power generation, which further widened the trade deficit and kept the yen under depreciation pressure.

Judging from the historical fluctuation of the yen exchange rate, with the continuous advancement of the internationalization of the yen, the influence of the US dollar index on the yen exchange rate has gradually weakened. In contrast, the yen exchange rate is more influenced by carry trade, Japan's import and export trade, international politics and other factors. Although carry trade has a great influence on the yen, import and export trade is still an indispensable part of the yen exchange rate analysis.

To sum up, in a relatively short period of time, the basic logic of the rise and fall of the yen, which is dominated by carry trade under Japan's low interest rate policy, is as follows:

(1) When the global economy goes up and the spread between the United States and Japan is at a high level or expanding, funds flow out of Japan to seek high returns and the yen depreciates; When the global economy goes down and the spread is low or narrowed, funds flow back to Japan and the yen appreciates.

(2) Due to Japan's perennial current account surplus, when Japan has a large current account deficit, the yen depreciates.

Finally, from a long-term perspective, the yen has been in a strong appreciation channel since the Plaza Accord.

At present, the global economic appreciation is weak, and central banks have cut interest rates. What kind of changes in the future will reverse the long-term appreciation trend of the yen, I am afraid I can only wait for time to give an answer.

Fig. 2 The channel of yen appreciation is still continuing.

Author: Jin Zhenyu, Financial Market Department of Minsheng Bank Head Office.