Summary of Key Points
Recently, the United States and Japan have jointly intervened in the foreign exchange market, but the exchange rate of the Japanese yen against the US dollar has still moved from 155 at the end of July to 159 on August 20, which is approximately 40% lower than the long-term average. Renowned economist Sheld believes that such market interventions can only buy time in the short term; the long-term trend of the yen depends on the monetary policies and economic fundamentals of both countries. The Bank of Japan may raise interest rates by 25 basis points in September, but the economy faces structural issues such as a declining population, missed opportunities in artificial intelligence (AI), and geopolitical tensions. The coordinated intervention by the US and Japan is more of a demonstration of alliance than concern about Japan selling US Treasury bonds and driving up yields.
I. Market Intervention: Effective in the Short Term, But Returns to Fundamentals in the Long Run
Sheld compares market intervention to a “speeding train”: In the short term, speculators and hedgers will temporarily avoid the impact of the intervention, causing the yen to rebound (for example, it dropped from 164 to 155 after the July intervention). However, once the intervention ends, the market will return to focusing on the fundamentals. If there are no changes in interest rate differentials between the US and Japan, economic growth, or inflation prospects, the yen will likely continue to depreciate (as it is currently approaching 159 again). In other words, interventions can only hold back the exchange rate for a temporary period and cannot address the underlying problems.
II. Coordinated Intervention by the US and Japan: More of a Political Gesture than Real Concern
There are rumors that the US is involved in the intervention to prevent Japan from selling US Treasury bonds and driving up yields, but Sheld dismisses this as unfounded. The US public holds approximately $32 trillion in US debt, with the private sector holding the majority. Even if Japan were to sell tens of billions of dollars in US bonds, the resulting price drop would immediately attract arbitrageurs to buy them, without affecting overall yields. The real motivations for the US are to maintain its alliance with Japan and to prevent the yen from depreciating too much, as a weaker yen makes Japanese exports cheaper and thus reduces the competitiveness of US goods.
III. The Bank of Japan’s Interest Rate Hikes: A Cautious Approach, but Facing Policy Contradictions
In contrast to the Federal Reserve’s aggressive 525 basis point rate hike, the Bank of Japan has only raised rates by about 100 basis points in two years, a much slower pace. Sheld predicts a 25 basis point increase in September and another 25 basis points at the beginning of next year, gradually moving towards a “neutral interest rate” of around 1.5%. However, raising rates comes with challenges: the Japanese government needs low interest rates to support the economy and repay debt (with a total debt exceeding $40 trillion), while also trying to reduce consumer costs by lowering the consumption tax (to 1% in April next year). This contradicts the goal of tightening monetary policy. Sheld emphasizes that interventions without accompanying rate hikes are ineffective; only by raising rates can arbitrage transactions that profit from the yen-dollar interest differential be halted, thereby increasing demand for the yen and providing real support for its exchange rate.
IV. Behind the Yen’s Depreciation: Trade Deficits and Structural Weaknesses
In July, Japan recorded a trade deficit of 634.5 billion yen (for the third consecutive month), with imports increasing by 27.8% (especially crude oil imports by 87.8%). The main reason for this is the depreciation of the yen, which has significantly raised import costs. Longer-term issues include three major structural weaknesses:
1. Declining Population: Conservative immigration policies have led to a shortage of labor.
2. Missed AI Opportunities: Japan has failed to capitalize on the development of artificial intelligence.
3. Geopolitical Risks: Geopolitical tensions in the region are undermining investor confidence. These factors contribute to a pessimistic outlook for the Japanese economy and undermine the yen’s strength.
V. The Final Conclusion: The Yen’s Trend Depends on Fundamentals
Sheld’s core message is clear: Whether the yen can stop depreciating depends, in the short term, on market interventions; in the medium term, on the pace of interest rate hikes by the Bank of Japan; and in the long term, on whether Japan can address its structural economic problems. Unless Japan resolves these issues, even rate hikes will not significantly reverse the yen’s decline. The joint intervention by the US and Japan is merely providing a window of time for Japan to adjust its policies.