THE WEAKNESS OF THE JPY AND INDEED THE CNY HAS CREATED A LOT OF PROBLEMS FOR MANY EAST AND SOUTHEASTERN ASIAN CURRENCIES...


There is a natural tendency for investors to focus on USD/JPY, particularly given that fact that Japan has to rely very heavily on imports of oil and gas for its energy needs, above all since the Fukushima disaster shuttered a large part of its nuclear power output and continued hefty resistance to restarting the largest nuclear plant on the west coast. But the KRW and CNY cross rates are also key factors in its competitive position within Asia, which will of course continue to be a, if not the, critical engine for global growth in coming years. The weakness of the JPY and indeed the CNY has created a lot of problems for many East and Southeastern Asian currencies, perhaps most clearly evident in Bank Indonesia’s decision to hike rates to defend the IDR. While the Fed embarking on a rate cut cycle is top of these countries wish lists, a recovery in the JPY would also be very welcome, particularly as it is clearly undervalued, as evidenced by the fact that the broadest effective JPY exchange rate index is at its lowest level since the start of the free-floating FX rates in the 1970s.


This leaves the BoJ and MoF with a high wire act to manage. While external demand has been relatively solid, in no small part assisted by a weak JPY, domestic demand has been at best slack. But for the sake of argument let us make the not necessarily safe assumption that a relatively virtuous wage-price cycle is emerging, enabling the BoJ to embark on a QT programme and a series of modest rate hikes, what would happen to fund flows, and by extension the JPY?


18 | ADMISI - The Ghost In The Machine | Q2 Edition 2024


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