The collusion of the USD/JPY exchange rate opens up a currency upheaval: Where does the certainty premium of RMB assets come from?

Under the rumors of a US-Japan joint intervention in the foreign exchange market, the USD/JPY exchange rate has shown significant fluctuations. Since January 23, the Japanese yen has rapidly appreciated against the US dollar. The market speculates that the US and Japan are about to jointly intervene in the foreign exchange market—some media reported that both governments have recently inquired about the USD/JPY exchange rate from multiple institutions through trading desks, and such rate checks are often a precursor to foreign exchange intervention. On January 27, Japanese Finance Minister Shunichi Suzuki stated, "If necessary, we will closely coordinate with US authorities to take appropriate action against exchange rate fluctuations," further heating market expectations for foreign exchange intervention, with the USD/JPY exchange rate briefly falling to 152.1. Although the US dollar index once retreated below 96, Trump stated, "The dollar is performing well, and I am not worried about the dollar falling. It can fluctuate like a yo-yo."

From a traditional framework, the credit of developed country currencies like the yen and euro comes from the endorsement and strong binding of the US dollar. Taking the yen as an example, even if there is a significant depreciation, it can be adjusted through foreign exchange intervention. Generally, there are three paths for implementing foreign exchange intervention:

• Method 1: Japan directly sells US dollar assets (such as US dollars and US Treasury bonds) from its foreign reserves and buys yen;

• Method 2: The US lends dollars to Japan through swap tools, Japan sells the dollars and buys yen, and Japan must repay on the maturity date. For instance, during 2020, the Bank of Japan used currency swap tools 97 times, borrowing approximately $600 billion from the US;

• Method 3: The US itself directly intervenes, selling dollars to buy yen. According to disclosures from the New York Federal Reserve, the US has only used this method three times since 1996, including buying yen in June 1998, buying euros in September 2000, and selling yen in March 2011.

Why does the US need to intervene directly this time? The demand to protect US Treasury bonds. If this US-Japan joint action is confirmed, it is highly likely that the third path has been chosen, meaning the US is intervening directly. For Japan, the urgency lies in facing the dual dilemma of "protecting the exchange rate" and "stabilizing the bond market"—the "psychological barrier" of 160 for the USD/JPY cannot be broken, but significant interest rate hikes could trigger concerns about fiscal sustainability and push up Japanese bond yields, making joint intervention a policy outlet to escape the pressure of unilateral rate hikes. For the US, the core demand is to maintain stability in the US Treasury market, avoiding large-scale selling of US Treasury bonds by Japan for independent intervention or a crisis in Japanese bonds that could trigger a chain reaction, while also implementing a weak dollar policy to balance the trade deficit. Meanwhile, the US can use this as leverage to secure substantial commitments from Japan in areas of US core concerns, such as investment and defense spending.

The long-term logic of the yen and Japanese bonds remains fragile, and the walls of internal circulation in developed countries are being breached. In the past, global asset pricing was based on three major logics. First, the US dollar is regarded as a hard currency, and other developed economies are "tied" to it due to their alliance with the US, enjoying currency stability and fiscal safety premiums. Second, non-US allies can obtain military security guarantees almost at no cost through their association with the soft power of the US. Finally, developed economies dominate "extractive" globalization by leveraging their industrial advantages, obtaining excess returns in certain regions through unequal arrangements in currency and military matters However, the current logic is changing, further highlighting the superiority of the Renminbi. At the monetary level, the relative decline of U.S. hard power has led to a loosening of the dual peg mechanism between developed fiat currencies and physical assets, increasing the risk premium of developed currencies and narrowing the premium gap with emerging markets. In terms of costs, the trend of de-globalization has weakened the low-cost advantage of developed economies, while the cost of military security guarantees has risen. On the revenue side, China's industrial rise has broken the situation where developed countries relied on their industrial first-mover advantage to capture monopoly profits, and "inclusive globalization" has provided opportunities for common industrialization for the Global South. Furthermore, with the strategic contraction of developed countries, the pricing of assets such as resources in the Global South has tended to rationalize, making it possible to achieve normal profit levels.

Xingzheng Macro Duan Chao Team

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