Policies matter in the Crisis

Global financial markets are rife with risks of cracks and collapse this year as central banks have been preoccupied with controlling inflation. The fast-paced stock market couldn’t stand the turmoil, nearly all stocks listed on exchanges fell by more than 30% (being priced), and volatility more than doubled. Meanwhile, the swift foreign exchange market is quietly waiting to see if it will spill over the border as anxiety turns into fear as endures the surge of the US dollar.

In the global foreign exchange market, exchange rate volatility is growing due to changes in expectations of future interest rates in major advanced countries, rising commodity prices, and geopolitical tensions caused by Russia’s invasion of Ukraine. In the midst of this, attention is paid to the progress of the two countries, which are maintaining accommodative financial policies while allowing for the weakness of their currencies, unlike most advanced countries, which are implementing financial tightening. Japan and China.

Japan continued to weaken after the yen (USD/JPY) exchange rate rose sharply on September 1 to 140 yen but finally exceeded 150 yen on October 20. As a result, the yen’s value fell 30% from the beginning of the year, and the yen level went back 32 years. The sharp drop in the yen’s value was most affected by the widening interest rate gap between the US and Japan due to differences in monetary policy between the US Fed and the Bank of Japan.

However, in the recent global financial market, generally in a risk-off atmosphere, the Japanese yen has a position as a safe-haven currency along with the US dollar and Swiss franc among major global currencies. Given that it is not avoiding weakness, I would like to know if there are any policy goals or intentions other than the simple market factor, such as the interest rate difference.

Japan is adhering to the policy (yield curve control) of maintaining the target level of the 10-year government bond yield, which is the long-term interest rate, at 0±0.25% in a situation where short-term interest rates are at the zero level. However, this year, as ultra-long government bonds (with maturities exceeding ten years) more than doubled, the Bank of Japan (BOJ) is planning to double the purchase of ultra-long bonds with maturities of more than ten years through the open market operation. The plan (Rinban Operation) was announced on September 30, which increased the yen-dollar exchange rate.

Currently, Japan has the momentum to maintain its accommodative monetary policy stance, including a negative interest rate policy, for the time being, while enduring the continued weakness of the yen due to the widening of the US-Japan interest rate gap. In other words, it is intended to prevent stagnation in domestic demand caused by a rise in global interest rates and deterioration in the profits of export-oriented companies. On the other hand, the US may not like it, but Japan will try to reduce the exchange rate volatility as much as possible by selling its US Treasury bonds and using the funds to buy the yen.

Meanwhile, in China, the yuan (USD/CNY) exchange rate moved stably at the 6.3–6.6 level in the first half of this year but rose to 7.30 on October 25 due to aggressive US monetary policy tightening and the Chinese economy slowing. The yuan has also fallen 13% this year, less than half of the Japanese yen, but it has been at its highest since 2007. China focuses on revitalizing the domestic economy hit by the Coronavirus while maintaining an accommodative monetary policy. In addition, it is said that measures are being taken to help domestic companies easily raise funds in overseas markets to prevent a sharp decline in the yuan.

China’s foreign exchange reserves stood at $3 trillion as of the end of August, and the equivalent of $1 trillion was used to prevent the yuan from depreciating during the economic downturn in 2015. However, as it emphasizes the number of foreign exchange reserves as an indicator of total national power, it is unlikely that they will actively defend the exchange rate while depleting their foreign exchange reserves as in 2015. Of course, behind the scenes, efforts to globalize the yuan in preparation for a new cold war with the US are paying off in part. According to a recently released Bank of International Settlements (BIS) report, China’s digital currency (e-CNY) was the most successfully issued and traded digital currency in an international CBDC payment pilot involving central banks from China, Hong Kong, Thailand, and the United Arab Emirates.

Meanwhile, Korea also entered the level of the 2008 financial crisis, and the 1997 foreign exchange crisis as the won (USD/KRW) exchange rate rose sharply. The financial and economic crisis that began in 2022 is currently unknown when it will end, and almost all countries are experiencing similar difficulties to the corona crisis.

The future exchange rate will be a competition between policies for its own companies and its people, depending on the circumstances of each country. The outcome of the match will determine it. In times of crisis, firm policies and a decisive government are important. In light of our neighboring countries, Japan and China, we hope that the Republic of Korea will not ask the government what it has yet to do or could have done in the coming Great Endurance.