The yen, which was traded at 113 to 114 yen per dollar in early March, has shown a sharp decline in the yen since the end of March to the low 120 range (122.6 yen as of April 4). From March 28 to 29, it even reached 123 yen per dollar. This is the first phenomenon in nearly seven years since May 2015, the heyday of Abenomics, when a deliberately low yen policy was implemented. Bloomberg, Nikkei, etc. reported that ‘125 yen per dollar’, also known as the ‘Kuroda Line’, has also entered the visible range.
The biggest reason for the recent weakness in the yen is the ‘continuous open market operation’ policy of the Bank of Japan announced on the afternoon of March 28. On the same day, the Bank of Japan announced that it would purchase unlimited 10-year government bonds for three days from March 29 to 31 so that the yield on government bonds does not exceed 0.25%. When the Bank of Japan purchases a large amount of government bonds in this country, it means that the demand for government bonds increases and the price rises. When Treasury bond prices rise (fall), Treasury yields fall (rise). The yield on government bonds is one of the interest rates that form the bottom of various market interest rates. So, when Treasury yields rise (fall), other interest rates tend to rise (fall). Such measures by the Bank of Japan imply that the Japanese government will continue its monetary easing (low interest rate) policy going forward. The intention is to dispel market expectations that Japan will also raise interest rates due to the recent rapid rate hike by the US central bank, the Federal Reserve.
This open market operation by the Bank of Japan is a monetary easing measure implemented to control the money supply in the market at a time when the atmosphere that interest rates will rise significantly in the future is spreading. First, by guaranteeing that the central bank of Japan will ‘do not allow the yield on government bonds to rise above 0.25%’, it will make market participants expect that ‘there will be no sudden rate hikes like the US in Japan’. Second, even though it is for three days, it puts more weight on the idea of ’unlimited’ purchases. The purchase of long-term government bonds, such as the original 10-year bond, has been a regular part of the Bank of Japan’s unique business. If you visit the Bank of Japan website, you can find out the details of long-term government bond purchases, such as 1 to 4 times a month, the set date, the number of offers (bids), and the amount of money. However, according to the document on the implementation of the continuous open market, the amount of purchase is unlimited. It showed a strong will to keep interest rates low, allowing private financial institutions to purchase all of their long-term government bonds even if they wanted to sell them to the Bank of Japan. Finally, as it goes without saying, when the Bank of Japan purchases government bonds, the amount of money flows to the private sector. Even in this open market operation, there were no bids in the first announcement on the morning of March 28, but at the second announcement in the afternoon, there were bids worth 64.5 billion yen, mainly from commercial financial institutions. Ultimately, the Bank of Japan purchased 520 billion yen of government bonds from the market. Separately, if you include the originally planned government bond purchase on March 30, it is counted that a total of 2.3 trillion yen worth of government bonds was purchased.
Bank of Japan continues to push for yen policy
The Bank of Japan has continued to pursue a low yen policy since ‘Abenomics’, which began in earnest with the re-establishment of the LDP in 2012. Bank of Japan Governor Haruhiko Kuroda expressed his opinion whenever he had spare time, saying, “From a macroscopic point of view, raising the economy and inflation at the same time is beneficial to the Japanese economy.” He judged that the lower the value of the yen through the interest rate gap with other countries such as the United States, the more advantageous it is for exporting companies. Also, the Japanese economy, which has suffered from chronic deflation (inflation), has been looking forward to the phenomenon of inflation (inflation) rising in line with economic growth.
As part of this financial and stock market stabilization policy, the Bank of Japan continued to intervene in the market. As mentioned earlier, the Bank of Japan’s purchase of long-term government bonds is one of the daily tasks that extend this policy. However, this purchase of long-term government bonds is being conducted in a completely different domestic and international environment than in the past decade. so ominous Why?
First of all, it is necessary to know the impact of Abenomics on the current Japanese economy. Initially, the plan of the Japanese government and central bank (Bank of Japan) was ‘low yen and monetary easing policy → strengthening corporate competitiveness → improving performance → increasing income → stimulating the economy → inflation’. But this blueprint has already sunk. Professor Yukio Noguchi of Hitotsubashi University criticized Abenomics as follows in a column he wrote for at the end of last year. “Due to the deliberately implemented low yen policy over the past decade, Japanese companies have not been able to compete in technology. As a result, Japanese companies were left behind compared to neighboring countries such as Korea, and the improvement in corporate performance did not go to the workers.” It is said that companies did not focus on technological improvement because they were able to obtain foreign exchange gains from the low yen.
The rise in income, which is the key to the cycle from the above yen to inflation, did not go as the government intended. According to a survey on private payrolls (2020) released by the National Tax Service of Japan, the average salary of Japanese people is only 4.33 million yen per year. It depends on which point in time it is based on, but it is difficult to say that income has increased. It decreased from 4.55 million yen in 2000 and 4.4 million yen in 2018. It is difficult to see because of the COVID-19 pandemic. This is because the average salary in 2019 before the corona epidemic was also 4.36 million yen, 40,000 yen less than the previous year (4.4 million yen). After the bubble burst, the average salary in Japan was between 4 million and 4.7 million yen at any time. As the economy bottomed out and incomes stayed the same or declined, inflation could not occur. Economist Takanori Sakaguchi points out the problem of small and medium-sized enterprises (SMEs) as follows as to why Japanese workers’ salaries do not increase.
“Small and medium-sized enterprises (SMEs), which account for 70% of Japan’s GDP, have low productivity due to lack of digitalization compared to similar-sized enterprises in other countries. It cannot create high added value, and there is a lot of useless office work. Also, because these companies are small, they are not subject to mergers and acquisitions, and cannot structurally increase profits. They can’t pay high salaries to their employees because they lose their pricing power to large companies and their profitability is low. Naturally, these companies hire low-wage employees and do not demand high technical skills from them. Incentives to raise wages cannot arise. In Japanese society, a system in which natural inflation cannot occur has already been established.”
Moreover, the benefits of the monetary easing policy jointly promoted by the Japanese government and the central bank were concentrated in the asset market rather than the real market. In particular, the stock market boasted an unprecedented rise. The Nikkei Index, which surpassed 10,000 in January 2013, when the Abe administration took office in earnest, stands at 27,736.47 as of April 4. The company’s global competitiveness has weakened, and the company’s value is overestimated due to a rebound in stock prices, and a contradictory situation has been unfolding that generates profits from foreign exchange gains but does not raise wages for workers.
I would like to understand the rapid yen depreciation after the announcement of the ‘continuous open market operation’ in this context. The Japanese government would argue that the quantitative easing policy that has been implemented on a daily basis has been further strengthened. However, the global environment is in the opposite direction. Almost all countries are implementing or contemplating monetary tightening. Above all, since the US interest rate is expected to rise in the future, international liquidity is highly likely to deviate from Japan. This is why they sell yen and convert them to dollars.
The cost of living in Japan is on the rise
The bigger problem is that Japan cannot escape the global inflation craze that is to come. This inflation is due to an increase in the price of imported raw materials rather than a natural price increase caused by the economic growth, which is not very desirable for the economy as a whole. In fact, the cost of living in Japan is already on the rise. According to Jiji News, the price of some daily necessities soared in April. Nisshin Oilio Group raised the price of household cooking oil by 12% compared to the end of March, and Kagome Foods raised its tomato ketchup product by up to 9%. Otsuka Foods raised the price of instant curry by 6% and the government selling price of imported wheat by 17.3% (compared to the end of March). Suntory Spirit raised the price of 12 years of whiskey from 8,500 yen to 10,000 yen. Inflation is ongoing in almost every necessities sector.
However, as discussed above, the average wage income of Japanese people has not changed or has decreased. There is little chance that it will increase in the future. In addition, Japan has not yet emerged from the Corona 19 situation to the extent that the ‘Corona Widespread Prevention Priority Measures’ were implemented until mid-March. The number of confirmed cases, which had stagnated, is increasing again recently, but the reason why the Japanese government is not able to come up with adequate measures against the coronavirus is because of concerns about economic activity and economic contraction. This is because, if the Corona measures are implemented in a situation where an average of 10% inflation is expected within this year, a recession is obvious.
You have to find a solution to where you went wrong and suggest a solution, but it’s not that simple. This is because the consequences of the past 10 years are piled up one after another. No matter how much Prime Minister Kishida calls for a ‘new capitalism’, it is meaningless unless it is accompanied by general and critical evaluation of Abenomics and improvement of its constitution. Therefore, the money released in the market through the purchase of government bonds will flow back to the asset market as usual. As it has been in the last 10 years. Anyway, this is a unique situation in many ways. Inflation was strong during the bubble period, but income rose that much. After the bubble burst, incomes fell, but prices did not rise. However, this time, the income has decreased or remained the same, but prices are rising remarkably, especially in areas closely related to daily life. Unprecedented fears of what will happen to Japanese society in the future have come upon us.
© EPN