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Japan and China are back in the forefront of the currency wars


via notayesmanseconomics:

We find ourselves starting the week by looking East again and in one clear context economics 101 might be struggling with this as a response to the interest-rate rise in Japan.

But the first rise in Japanese borrowing costs in 17 years — coming at a time when other major central banks are contemplating rate cuts — has the potential to fundamentally change the yen’s role in financial markets, said investors and economists. ( Financial Times)

They are discussing the Carry Trade.

The end of negative interest rates in Japan threatens to bring a new era of volatility for the yen, denting some of its allure to international investors and foreign governments seeking a reliable vehicle for low-cost borrowing. ( Financial Times)

They seem to have rather confused themselves though with this.

Japan’s currency has held a unique position in foreign exchange markets since the 1990s, as the Bank of Japan kept rates low or negative to spur economic growth and stave off deflation. This has helped keep the yen stable, trading within a relatively tight range for much of the past 35 years. ( FT)

So stable in fact that they did this in 2022.

TOKYO, Oct 31 (Reuters) – Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said, with investors keen for clues about how much more the authorities might step in to soften the yen’s sharp fall.

I also remember the “flash crash” when it went pretty much overnight to 103 versus the US Dollar. If we look at things more strategically the policy of Abenomics and the efforts to weaken the Japanese Yen were a response to it being strengthened by the Carry Trade.

But anyway the rise in interest-rates has been accompanied by a decline in the Yen. From Reuters today.

The USDJPY level surged to four-month highs last week even as the Bank of Japan  for the first time in 17 years.

At 151.42 versus the US Dollar we are back in the zone where Japan intervened back in 2022. So it was no great surprise to see this on the wires.

The Japanese yen saw some strength on Monday, with the  pair falling 0.1% after a top Japanese currency diplomat offered a verbal warning on potential intervention by the government.

Masato Kanda, vice finance minister for international affairs, said that recent weakness in the yen did not reflect the currency’s fundamentals, and that the government remained ready to respond to the yen’s slide.  ( Reuters)

As you can see the Japanese state has begin open mouth operations to support the value of the Yen. The next step is for such words to be translated as “bold action” which means that actual intervention is getting nearer. As an aside it is always amusing to here officials claim that “fundamentals” do not reflect the move when usually they do. Currency markets are not always correct but they are not stupid.

Japan’s economy

Whilst the economy has revised itself out of the recession it thought it was in during the latter half of 2023 the economy still contracted over that period. This morning the Cabinet Office has released its summary of business conditions and described them as.


Our valiant diplomat above will be hoping people do not spot that one. Whilst the Coincident indicator was revised up it has fallen from 115.9.5 in December to 112.1 in January. The accompanying chart goes back 3 years and this is the sharpest decline on it. The leading index fell slightly as well to 109,5.


Last week the Chinese Yuan was under pressure as well.

SHANGHAI, March 22 (Reuters) – China’s yuan declined to a four-month low against the dollar on Friday on expectations of monetary easing, breaching a key threshold and prompting state-owned banks to step in to defend the currency.In the spot market, the onshore yuan fell to the weak side of the psychologically important 7.2 per dollar level in early trades to hit a low of 7.24, its softest since Nov. 17, 2023.

There is something of an irony in the statement below as this time around monetary easing is put as the driving force.

The yuan has fallen roughly 2% in three months, and has been pressured by growing market expectations of further monetary easing to prop up the world’s second-largest economy as well as a weaker Japanese yen .

So the find themselves with a touch of The Vapors.

I’m turning Japanese, I think I’m turning JapaneseI really think soTurning Japanese, I think I’m turning JapaneseI really think so.

There is common ground in the sense of economic struggles. If we look at our theme of the bursting of the property bubble putting a brake on the economy it is in the news today.

Chinese real estate developer China South City issues a profit warning on HKEX, projecting an after-tax loss of HK$4-5 billion for FY2023. ( CN Wire)

These things feed into each other as already struggling property developers find it harder to make payments on US Dollar borrowings.

We can look at the official view this morning.

BEIJING, March 25 (Xinhua) — The central parity rate of the Chinese currency renminbi, or the yuan, strengthened 8 pips to 7.0996 against the U.S. dollar Monday, according to the China Foreign Exchange Trade System.

But there is still a problem.

Offshore yuan broke the 7.25 mark and up by over 300 pips against the USD after the PBOC set a stronger fixing rate for the yuan on Monday morning. ( CN Wire)

What we are seeing here is the start of intervention. First we see that the PBOC runs a type of managed float and the message is no fall today and in fact they have raised it very marginally and backed it up.

Reuters reported that the People’s Bank of China had instructed state-owned banks to buy yuan and sell dollars in the open market, to support the Chinese currency.

This has posed an issue in the way that they have widened the gap between the onshore and offshore Yuan. Yes they stopped the fall in the offshore Yuan which had gone as low as 7.28 but it still fell on the day.


Back on the 30th of June last year I pointed out this.

We see that the countries with the most mercantilist trade policies are also running a plan for a lower currency. In one case it is a depreciation and the other more of a devaluation but the end game is the same. ……. They may step in from time to time but do they really want to stop the fall? I do not think so which may leave Japan’s previous intervention in an awkward place.

In the meantime the Yen has weakened and the Yuan is at a similar level but we are entering the period when the latter fell last year. Will it do the same again?

Yet whilst in one way China and Japan have the same influences in another they do not.

The US and Japan are planning the biggest upgrade to their security alliance since they signed a mutual defence treaty in 1960 in a move to counter China. ( FT)


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