The latest US employment report last Friday was far-reaching, with only 110,000 new jobs and the unemployment rate rising from 4.1% to 4.3%. Although the labor force participation rate and GDP growth remain strong, and the US credit system crisis has not actually occurred, the global financial market has taken the lead in betting that the US economy is on the verge of deterioration. At the same time, the Bank of Japan raised interest rates by 15BP last Wednesday, exceeding expectations, and the yen quickly rose above 142. So we see that after digesting the news of unemployment and Japan's interest rate hike over the weekend, the capital flight of the entire risk asset has entered a climax stage. On August 5, the global financial market set off a storm. Bitcoin fell below $50,000, the Korean GEM circuit breaker, the Taiwan Index recorded the largest single-day drop, the Nasdaq Technology ETF hit the limit, and the Indian and Australian stock markets were not spared. The decline continued, and funds poured into the bond market for risk aversion. The Japanese market is particularly typical. The Nikkei 225 Index and Japanese government bond futures both circuit-breakers in the early trading, and the 10-year Japanese bond yield fell to 0.785%. The Nikkei Index has given up all its gains in 2024 in the past three weeks.
To reverse this concern, the Federal Reserve urgently needs to come forward to appease. It is reported that the Federal Reserve will hold an emergency meeting today to discuss the interest rate policy after the Japanese stock market crash. Is it expected that we will see an interest rate cut in advance this week? What is the connection between the 8/5 global stock market crash and Japan's interest rate hike? Is Japan's interest rate hike the main reason for the rapid fermentation of this "recession trade"?
First of all, it should be made clear that this round of sharp pullback in risky assets, led by US technology stocks, is closely related to the Bank of Japan's aggressive interest rate hikes. The core logic is the rapid appreciation of the yen, which has caused investors who previously borrowed cheap yen to buy US assets to suffer losses. Arbitrage funds began to close US stocks and repay yen debts to reduce risks. In a deeper sense, the traditional yen interest rate arbitrage trading path has begun to loosen and faces liquidity risks.
The rise of the yen carry trade
After the economic bubble burst in the early 1990s, Japan entered a long period of deflation, with slow economic growth and low corporate investment willingness. Against this background, Abenomics was launched in 2012. Simply put, it is an extremely bold monetary easing policy.
First, the Bank of Japan implemented large-scale quantitative easing (unlimited QE), in which the central bank issued more money in the form of purchasing government bonds to lower interest rates and increase liquidity. In particular, the "Yield Curve Control" (YCC) policy was adopted. Specifically, the Bank of Japan set an upper and lower limit for yields, promising to maintain the yield of 10-year Japanese government bonds within a target range close to 0% (the current target range is adjusted to ±1%). If the yield rises to the upper limit, the central bank will buy more government bonds to lower the yield; if the yield falls to the lower limit, the central bank may reduce the amount of bond purchases. Secondly, the Bank of Japan announced the implementation of a negative interest rate policy in January 2016, lowering the policy rate to -0.1%, aiming to reduce interbank borrowing costs and encourage funds to flow into the real economy, thereby promoting consumption and investment and raising inflation expectations.
In this context, JPY carry trade has gradually become popular. Investors borrow yen at a low interest rate, exchange them for high-interest currencies (such as US dollars), and invest the funds in the US stock or US bond market to earn interest or asset appreciation. The investor's profit essentially comes from the interest rate difference between the borrowed currency (yen) and the investment income (US dollars).
As the United States enters a cycle of interest rate hikes in 2022, the role of the yen as a low-cost source of financing becomes more prominent. Mrs. Watanabe can not only earn the interest rate differential of US dollar assets, but also the exchange rate differential of the depreciation of the yen. As the United States raises interest rates, major economies around the world also follow suit and enter a cycle of interest rate hikes in order to stabilize exchange rates and avoid capital outflows. Among them, only Japan still adheres to its low interest rate policy. The increase in the interest rate differential between Japan and other economies has invisibly magnified the speculative gains of yen arbitrage. It can be said that the soaring of US technology stocks during the tightening cycle is largely due to the low interest rate of the yen.
Abenomics has achieved long-term negative deposit interest rates and near-zero loan interest rates, promoted frequent swaps between Japanese and American currencies, and consolidated the yen as a world currency. This is very beneficial to export-oriented countries like Japan, and also makes it relatively easy to acquire Japanese stocks and people's wealth, especially the high-interest stocks of the "Big Five Trading Companies" have attracted a lot of capital. The wealth effect driven by foreign investment has turned Japan from long-term deflation to moderate inflation.
However, since a large amount of yen has been converted into US dollars or US dollar assets, the yen has been depreciating against the US dollar for a long time, not to mention that international short-selling capital has always been eyeing the yen. From 2012 to 2024, the exchange rate of the US dollar against the yen has risen from 70 to 162, and the yen has depreciated by more than 100%. Therefore, the mild inflation that the Japanese people are thinking about is largely due to the imported inflation that Japan is forced to bear as a full-resource purchasing country, and economic recovery still has a long way to go.
This trend has recently reversed, mainly because the United States is about to enter a rate cut cycle. In early 2024, the newly appointed Bank of Japan Governor Kazuo Ueda reversed the negative interest rate policy of the previous governor Haruhiko Kuroda and began to provide the market with forward-looking guidance on rate hikes. However, the market is skeptical about this, and the yen has depreciated all the way to 160 in the first half of this year. The speculative market believes that Japan's inflation is not sustainable, and Japan will return to deflation after the United States enters a rate cut cycle. As a result, the Bank of Japan unexpectedly raised interest rates by another 15 basis points last Wednesday, and the yen quickly rose to 142. In particular, after Ueda also stated that the size of the national debt would be reduced in the future, the yen began to quickly pull back to 142 from around 160. Arbitrage traders were really scared by the tough attitude of the Bank of Japan this time, and a large number of assets denominated in US dollars were forced to close their positions and exchange them for yen to repay debts.
Is Japan cooperating with the United States or rebelling against it?
This round of interest rate hike in Japan has caused two major impacts: first, a global stock market retracement, and second, the suspension of yen carry trade. From different perspectives, we try to speculate on two paths of this interest rate hike:
We know that the domestic reason why the United States is reluctant to cut interest rates is not because it does not want to cut interest rates. At least on the surface, the stock market is too active at present. In fact, it is worried about the resurgence of inflation. Even though small and medium-sized enterprises are still lying at the bottom, driven by large-cap technology stocks, the stock market and GDP led by the financial sector and the service industry have not declined significantly. If interest rates are cut rashly at this time, it will definitely greatly stimulate the risk market, thereby inflating bubbles and even bringing about a rebound in inflation. Now that the Bank of Japan has taken action, coupled with the rise in unemployment, the result is that the US stock market has finally retreated a bit, which is both a reason for cutting interest rates and alleviates a concern about cutting interest rates at this time.
On the other hand, from the perspective of Japan's own economic development, raising interest rates at this time is not a wise choice. Because raising interest rates will inhibit economic growth, and the current "false inflation" in Japan does not constitute a reason for economic overheating (the Japanese stock market crash this morning is a true reflection of the market. There are too many "zombie companies" in Japan that survive on low interest rates. If you want to raise interest rates, I will die for you to see). This can only mean that the core factor affecting the judgment of the Bank of Japan is not the domestic economy, but to increase the borrowing cost of the yen, and willing to endure the pain of raising interest rates. The yen has boarded the same train as the US dollar through low interest rates and enjoys the benefits of global currency. However, the low-cost yen has also become the best weapon for international capital to attack the yen. Therefore, Japan's interest rate hike is not actually the goal. Raising the yen lending rate is the bigger chess game played by Japan. In the past, it has been around 0.05%, and it has been raised to 0.45% since the beginning of this year.
In fact, raising or lowering interest rates cannot solve the core demands of Japan and the United States at present. Japan wants to shrink its balance sheet, while the United States is eager to expand its balance sheet. In the past, global public opinion has deliberately promoted interest rates that have long been insensitive, while ignoring the importance of shrinking and expanding the balance sheet. Japan is now raising interest rates, from negative to 0.25%, but the result is that the interest rate gap between Japan and the United States is still as high as 5%. Institutions will continue to dismantle the yen, which cannot solve Mrs. Watanabe's problem. When the interest rate hike was announced last Wednesday, the yen exchange rate jumped up and down, but there was actually no definite direction. It was not until Kazuo Shita said that the Bank of Japan decided to reduce its holdings of Japanese government bonds by 7%-8% within two years that the yen began to appreciate significantly. This is actually a form of shrinking the balance sheet and debt. Issuing government bonds is the main way for Japan to print money, which is equivalent to reducing the amount of money issued and supply, from unlimited quantitative easing in the past to moderate easing in the future. Only by thoroughly expressing to the market that the yen is ready to enter a tightening cycle, completely reversing the exchange rate trend of the yen's depreciation, and even using the possible economic crisis in the future to complete the separation of the yen from the US dollar. The Japanese yen will not be tied to the car or even sacrificed in advance when the US-style globalization and dollar hegemony completely collapse. This is a way out that the Japanese government seeks for itself. At the same time, although Japan will experience the pain of clearing out zombie companies in the short term, in the long run it will effectively activate the competitive awareness of domestic companies and maintain global competitiveness.
Regardless of the purpose of Japan's interest rate hike, the fact is that the United States is about to officially enter a cycle of interest rate cuts. The era of "false balance sheet reduction" is over, and the United States has no choice but to start real balance sheet expansion. With liquidity easing again, the bull market of cryptocurrencies has not ended yet. #加密市场急跌 #日本加息 #黑色星期一