On the 20th of this month, the yen exchange rate fell to the 150 yen level against the US dollar, marking the lowest level of yen depreciation in 32 years.
At the end of last year, economists and others predicted that the yen would trade between 118 and 122 yen to the dollar this year.
Few people, even among experts, expected the yen to depreciate so quickly.
In this column, we will once again look back at why the unexpected depreciation of the yen occurred.
When I interviewed 15 people involved in the market, various unexpected things came to light.
(Economics Department reporter Kei Nakazawa)
Unexpected 1: U.S. Inflation = 15
The biggest surprise, aside from Russia's invasion of Ukraine, was record US inflation.
Market insiders say the following:
FRB=Federal Reserve Board Chairman Powell himself is no exception.
At the Jackson Hole conference held in August last year, I explained that "inflation is temporary," but as you all know, I was wrong.
Hiroshi Miyazaki, chief economist at Mizuho Research & Technologies, said, ``The Fed has so much influence in forecasting the market that when the chairman says inflation is temporary, everyone believes it. I overlooked the major premise that it is also possible,” he recalls.
So where was the unexpected?
Food and energy prices soared in response to the situation in Ukraine, but what market officials could not foresee was the serious labor shortage that is the cause of inflation in the United States.
In the United States, even though the corona crisis is in the process of converging, people are still not returning to the labor market.
This graph shows changes in the labor force participation rate in the United States.
The labor force participation rate indicates the ratio of the working population (people who want to work) to the working age population (16 to 64 years old population).
With the post-corona economic recovery, the labor force participation rate continues to improve.
However, we can see that workers over the age of 55 have not returned.
The rule of thumb is that if you raise wages, more people will come to work.
This has led to further wage increases, leading to higher prices.
Mr. Hiroshi Yoshida of Okasan Securities, who lives in New York, talks about his unexpectedness as follows.
“All over town, there are cars and posters that say ‘NOW HIRING’. Fiscal and monetary policies to support the economy, which has been depressed by the coronavirus pandemic, have led to soaring stock prices and housing prices, and the value of individual assets is rising.As a result, more people are retiring early. The slow recovery in the U.S. labor force participation rate was completely unexpected.”
Unexpected 2: Transformation of FRB Chairman Powell and BOJ Governor Kuroda's stubbornness = 7 people
Some say that the attitudes of the heads of the central banks of Japan and the United States toward their respective policies were unexpected.
Fed Chairman Jerome Powell has always emphasized dialogue with the market and was said to be cautious about raising interest rates sharply.
However, at the meeting to decide monetary policy held in January, it suggested that the interest rate would be raised at a faster pace than expected.
And at the Jackson Hole meeting in late August, he made it clear that he would prioritize curbing inflation, even if it meant "pain" for households and businesses.
Many market participants said they were surprised by the transformation into an inflation fighter.
Kuroda, Governor of the Bank of Japan.
While the yen exchange rate has fallen to the 150 yen level against the dollar, it has expressed the view that a unilateral depreciation of the yen is "negative for the Japanese economy," but still shows a stance to continue the current large-scale monetary easing. .
Even if long-term interest rates exceed the Bank of Japan's upper limit of 0.25%, or if the consumer price index rises above 3%, reaching the level for the first time in 31 years, this stance will not change.
As long as the Bank of Japan does not change its monetary easing stance, the interest rate differential between the U.S. and Europe, which are rushing to raise interest rates, will widen, which will lead to a weaker yen.
Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "The yen has depreciated to the 150 yen level against the dollar, and the consumer price index has risen by 3%. Somewhere in my heart, I thought that they would move to revise monetary policy.
Unexpected 3: Mrs. Watanabe's movement = 3 people
Some market participants said that the movements of individual investors were unexpected.
It has been said that Japanese individual investors (commonly known as Mrs. Watanabe) who engage in FX (Foreign Exchange Margin Trading) tend to buy and sell with a so-called "contrarian" attitude that goes against the flow of the market.
However, since the United States turned to raising interest rates, from March onwards, individual yen-selling and dollar-buying will accelerate to match the trend of the yen's depreciation.
According to the Financial Futures Association of Japan, in September, the trading volume of the yen and the dollar exceeded 1,000 trillion yen for the first time since statistics began in 2008.
Compared to the average of 2019 before corona, it is actually 6.6 times.
It was also pointed out that it was unexpected that these investors were looking in one direction rather than being "contrarian".
Takuya Kanda, head of research at Gaitame.com Research Institute, said:
“Because there is a clear difference in monetary policy stances between Japan and Europe and the United States, individual investors are participating in transactions with peace of mind on the assumption that the yen will continue to weaken. So, individuals have changed their mindset to have foreign currency to increase their assets as much as possible to protect their livelihood.I have been watching the financial market for 35 years, but I have never seen such a dramatic change."
Can you anticipate the unexpected?
Behind the accelerated depreciation of the yen was a combination of such unexpected movements even among market professionals.
In the midst of news such as record levels and historical events, what is the meaning of "unexpected" events when viewed in the long-term trend?
And was it really unthinkable?
I would like to get a hint to read ahead of the times while continuing the verification.
Next week's biggest focus is the 3rd.
In the early hours of this day in Japan time, the results of the meeting to decide the monetary policy of the FRB = Federal Reserve Board, which is the central bank of the United States, will be announced.
The market expects the Fed to decide to raise interest rates by 0.75% for the fourth time in a row, unprecedented in history.
At the next meeting in December, attention will also be focused on Chairman Powell's remarks as to whether the range of interest rate hikes will be reduced to 0.5%.
In Japan, the settlement of accounts of major companies such as Toyota Motor Corporation and the Sony Group is one after another.