Bond Economics: Japanese Yen

The rapid decline of the Japanese yen — recently stabilised by a (presumed) round of intervention — has brought forth the usual “currency crisis” discussion from the usual suspects (people you do not want to listen to for macro views). I cannot say that I am following Japan closely right now (I used to in the now distant past…), so I will just make a few generic points.

• 1The yen is a floating currency, and no sector in Japan borrows in foreign currencies to any large extent. Historical currency crises are artefacts of managed exchange rate schemes or foreign borrowing.
• Although I would prefer a more timely data source, the chart above from the IMF World Economic Outlook database shows Japan’s current account surplus. The Japanese private (and public) sector have accumulated a large amount of financial claims on the rest of the world. A drop in the value of the yen increases the value of those foreign currency assets. Sooner or later, if the yen gets stupidly cheap, repatriation looks interesting for Japanese savers.
• Pretty much everyone wildly over-estimates the effect of exchange rate movements on domestic inflation. The price level in Japan (as measured by the CPI) has barely budged since the mid-1990s, while the yen has done any number of wacky things over that period.
• Could Japanese government bond yields rise? Sure, why not? The problem with JGB doom stories is that most of those Japanese savers with foreign currency assets have implicit/explicit actuarial liabilities denominated in Japanese yen. Higher JGB yields are exactly what they want to see.
• Although I am in no great position to understand why Japan intervened, the most likely reason was that they disliked how disorderly the previous decline was. Nobody in the private sector wants to catch a falling knife. But once the intervention takes out some of the weaker hands, it acts as a signal for other actors to start buying yen, creating a two-way market again.