(Bloomberg) — As the yen hits new lows, some investors are anticipating a scenario almost unthinkable in a region busy supporting currency declines: a series of competitive moves that could trigger a new Asian currency war. We are pondering the scenario of a weaker yen.
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The alleged intervention to drag the yen down from its 34-year low against the dollar is unlikely to have a lasting effect if Japan continues on its own, with the yen’s already struggling depreciation likely to return. The possibility of this happening is increasing. This could bring competitive tensions with exporting neighbors South Korea and Taiwan to a climax, adding to the pressure on China, where there is already talk of a possible devaluation of the yuan. .
A destabilizing yen weakness will force Japan’s neighbors to take extreme action, even if countries’ efforts so far have been to prop up their currencies rather than capitulate and allow them to depreciate. The theory is that it could be a trigger. Although this view is in the minority and does not imply a repeat of the Asian financial crisis, it is still gaining some momentum in a scenario of a prolonged recovery of the dollar.
“I haven’t heard the term competitive valuation in a long time,” said Henry Quek, head of global markets for Asia Pacific at State Street Corporation. However, “we are in a situation where there is the possibility of a series of competitive devaluations” if the yen depreciates further.”
Asia’s central banks have been active in supporting their currencies against the dollar, but the yen’s depreciation has been the worst in the region, hurting the export competitiveness of Japan’s neighbors. This would be outraged even if the reasons for the yen’s decline were not solely within the control of the Japanese government, such as the wide gap between Japanese and global interest rates and investor preferences for U.S. assets.
In late April, the yen fell to its lowest value since 1992 against the renminbi, the currency of Japan’s largest trading partner. The exchange rate against the won is near the lowest since 2008, and against the Taiwan dollar it is the lowest in 31 years.
“It’s happening,” Kisoo Park, senior portfolio manager at Manulife Investment Management, said in response to a question about competitive devaluations. “Whether intentionally or unintentionally, currency devaluations are happening and are impacting other parts of the region.”
gravity
Market watchers say the yen’s chaotic depreciation could still exert gravitational pull on the region’s currencies, although it is not as strong as in the past.
“Most directly, a significant yen depreciation will drag other Asian foreign exchange rates, such as the Korean won and Taiwan dollar,” said Arjun Vij, portfolio manager at JPMorgan Asset Management.
Koon Goh, head of Asia research at ANZ Group Holdings, said the won and Taiwanese dollar would struggle to benefit from the artificial intelligence investment boom in these countries until the yen exchange rate reversed.
To be sure, there are signs that Japanese authorities may not allow their currency to depreciate further. Last week, the dollar fell below the psychological milestone of 160 dollars for the first time in more than 30 years, but has stabilized to around 155 dollars due to two suspicions of government intervention.
There is also little concern about a financial crisis in the region, as most Asian countries are well prepared to avoid a repeat of the turmoil of the late 1990s. Foreign exchange reserves have been strengthened, reforms with increased financial sector oversight and deepening of local capital markets have been seen.
But for Manulife Park, a broad-based dollar appreciation and yen depreciation to the 170-180 range will not only cause problems for Asia, but will also have broader implications for emerging market currencies.
“If the dollar strengthens and the value of Asian currencies declines, funds investing in local markets will be forced to exit,” he said. “It will cause a risk-off event where emerging markets as a whole will collapse, U.S. Treasuries will rebound, and stocks will sell off.”
Although the probability of such a scenario is low, it cannot be ruled out, he added.
Emerging market currencies are particularly vulnerable to fluctuations in the yen due to their role as funding currencies for carry traders who borrow where interest rates are low and invest where interest rates are high. A measure of the attractiveness of carry trades across eight emerging market currencies has fallen from March highs, thanks to increased volatility in the yen, according to data compiled by Bloomberg.
One of the best bets of the year as carry trades wobble due to fluctuations in the yen market
Wildcard
A key wild card is how China will handle the yuan, which has been weakened by the yen and is at risk of destabilizing the region. China’s managed currency is considered the anchor of the country’s currency, and even small movements can have a big impact.
There is already quiet but growing speculation that the Chinese government may need to take extreme measures to support its moribund economy, with a big-bang move leading to a devaluation of the renminbi. It is being said.
Discussion of yuan devaluation emerges as traders consider next currency shock
John Woods, chief investment officer for Asia Pacific at Lombard Odier Hong We are starting to be concerned about the level of Kong Ltd. “So for me, that’s the risk that we’re very focused on right now in the Asia space.”
–With assistance from John Cheng.
(Adds more content regarding yen carry trade)
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