TOKYO, May 12 (News On Japan) – Japan is not the only country dealing with a weakening currency. In a situation that could be described as ‘dollar dominance’, countries in Asia that have previously faced currency crises are also starting to implement currency protection measures. We explore what lies ahead in light of the currency’s devaluation.
Market intervention in thin trading? “Barrages of attacks have been launched!”
On the afternoon of April 29, 2024, a bank official in Bangkok, Thailand, was surprised. In the morning, the yen had plummeted to 160.24 yen per dollar, but after 1 p.m. it turned dramatically toward yen appreciation.
Every time the yen tried to weaken, it pulled back sharply to strength. At least two large-scale market interventions are believed to have taken place during Asian trading hours and in the evening when the London market opened.
Interventions believed to be worth 8 trillion yen
The market interventions believed to have been carried out by the government and the Bank of Japan on April 29 and the early morning of May 2 are estimated at around 8 trillion yen, according to an analysis by financial brokerage Toyo Securities Research.
In recent years, there have been interventions buying the yen and selling the dollar in 2022, but if the recent moves that would be considered interventions are analyzed in this way, these would be the largest interventions for buying the yen in a week are.
Not just Japan: Southeast Asian countries are being forced to defend their currencies
Japan is not the only country forced to respond to the rapid currency devaluation. Amid what’s being called “dollar dominance,” emerging economies in Asia and elsewhere are also working to defend their currencies. Indonesia has repeatedly intervened in the market, and Vietnam is also strongly resisting the devaluation of its currency.
Price increases in Indonesian kitchens
Indonesia’s repeated market interventions come amid fears of a resurgence in inflation, which has shown signs of recovery. This is clearly visible in the food stalls of the capital Jakarta.
During Ramadan, which lasted until early April, stalls were packed with people at sunset when food and drink were allowed, but food prices soared and some shops implemented price increases of up to 40%. Indonesian inflation rose to the 3% mark for the first time in seven months in March 2024. Unfavorable weather, combined with the increase in import prices due to the devaluation of the currency, has caused food prices to rise. The rupiah has fallen to its lowest level in four years, and in April the Bank of Indonesia decided to raise interest rates for the first time in six months, explaining that the aim was to “increase the stability of the rupiah exchange rate” .
Labor outflow in Malaysia
In Malaysia, the depreciation of the currency is leading to an outflow of workers. The Malaysian ringgit fell to levels not seen since 1998 in February 2024.
Local media New Straits Times reports that restaurants in Johor state, which borders Singapore, are facing a labor shortage as more people seek higher wages in Singapore due to the weaker currency.
The trilemma of international finance
When discussing currency devaluation and market interventions, a term often heard in the financial world is the ‘trilemma of international finance’.
The trilemma, as defined in dictionaries, refers to a situation where none of the three solutions is acceptable. The ‘trilemma of international finance’ means that it is impossible to achieve ‘free movement of capital’, ‘exchange rate stability’ and ‘independence of monetary policy’ at the same time; one must be sacrificed. Many advanced countries have chosen to sacrifice “exchange rate stability” in favor of maintaining the “free movement of capital” and “independence of monetary policy,” leaving this to market forces. China has given up the ‘free movement of capital’ to maintain ‘exchange rate stability’ and ‘independence of monetary policy’. In the case of Indonesia, which has decided to raise interest rates, and Thailand, which has maintained higher interest rates without lowering them, they have opted for ‘exchange rate stability’ while embracing ‘free capital movement’, forcing them to raise interest rates or maintain interest rates. high interest rates, sacrificing “monetary policy independence.”
The economic power behind the yen
In Asia, people are still talking about the Asian financial crisis of 1997. The crisis, caused by the sharp fall of the Thai baht, spread not only to Southeast Asia, but also to countries such as South Korea and Russia.
During the crisis, countries sought support from the IMF and other organizations, and as a result of the austerity and high interest rate policies imposed by the IMF, economies suffered significant damage. In Thailand and Indonesia this even led to a change of government. One of the causes of the sharp decline of the Thai baht was the movement of hedge funds. Hedge funds are questioning the economic reality of superficial exchange rate stability under the quasi-fixed dollar peg system and short-term fund inflows that led to the currency crisis.
The yen’s depreciation is often explained by the interest rate differential between Japan and the United States, but there is more to this currency weakness. We are prompted to reflect on the Asian financial crisis and wonder whether speculators are seeing through Japan’s economic growth and declining “earning power.” We must also consider whether the prolonged massive monetary easing and the supply of huge amounts of money have devalued the currency, or whether there has been a neglect of growth strategies, improving competitiveness and sustainable fiscal management. It feels like a time to calmly assess what lies behind the yen’s depreciation.
Upcoming focus Next week, on the 15th, the US Consumer Price Index will be released. With the timing of the Federal Reserve’s interest rate cuts in focus, the outcome will be closely watched as it could have a significant impact on the yen exchange rate.
Source: NHK
