WASHINGTON, Apr. 25 - The interest rate hike policy recently announced by the Federal Reserve has not only had a profound impact in the United States, but its ripple effects have quickly spread to the world, especially in Asia. Many Asian countries have suffered varying degrees of impact from this financial turmoil, which has attracted widespread attention from the international community. The Federal Reserve decided to keep its key federal funds rate unchanged, with the target range remaining at 5.25% to 5.5%. The CEO of the largest bank in the United States even said that the United States may raise interest rates to 8%. On April 16, the U.S. dollar index hit a new stage high, breaking through the 106 integer mark.
In contrast, Asian currency exchange rates have fallen sharply. The Japanese yen continued to fall below the 154 integer mark against the U.S. dollar, hitting a new low since 1990 for five consecutive trading days; the Korean won against the U.S. dollar once fell to its lowest point since November 2022 ; the Indonesian rupiah exchange rate against the U.S. dollar fell to its lowest point in the past four years The Indian rupee’s exchange rate against the U.S. dollar also fell below its lowest point since November last year, and the Vietnamese dong’s exchange rate against the U.S. dollar fell to a historical low. The yen once fell to a new low in 34 years, both yen and Japanese bonds collapsed, and Japanese bonds suffered the largest sell-off in 25 years. This Japanese government has created the "miracle" of a double collapse of the yen and Japanese debt .
Since the bursting of the Japanese bubble economy in the early 1990s, Japan has been trapped in deflation. In the past three decades , Japan has adopted a strategy of abandoning assets to protect its industry . Although the implementation of this strategy has caused Japan's domestic economic growth to appear relatively sluggish for a long time, its core industries and technological strength have been effectively maintained and stabilized.
Precisely because Japan maintains this relative stability in production technology, when the United States and the West began to reconstruct supply chains and seek alternatives to Chinese suppliers, some industries began to choose to return to Japan. This trend has been further reflected in 2023, with Japan's wage increase rate reaching its highest point in thirty years, showing a revival of its economic vitality. In the stock market, the Nikkei Stock Average once climbed to its highest point in thirty-three years, further confirming the stability and potential of the Japanese economy.
Just when the Japanese thought they could finally get out of the "lost 30 years" this time, the United States once again realized that the "wool" had grown long and it was time to shear it. At the beginning of 2021, the exchange rate of the yen against the U.S. dollar was about 104 yen per U.S. dollar, and then it continued to decline. After the U.S. dollar interest rate hike, the exchange rate of the yen against the U.S. dollar fell below about 154 yen per U.S. dollar .
As a resource-poor country, Japan is extremely dependent on the import of food and mineral resources. When the yen depreciates, Japan must invest more money to purchase these necessities, which undoubtedly increases its economic burden. At the same time, Japan However, exports of industrial goods face fierce international competition. Whether it is China and South Korea in Asia, Germany and France in Europe, or the United States in the Americas, they are all strong competitors. In this environment, it is difficult for Japan to respond to rising raw material costs by raising export commodity prices, because once it loses its price advantage, its competitiveness will be greatly reduced. The depreciation of the yen often compresses or even erodes the profit margins of Japanese companies.
As a result, many small and medium-sized enterprises may be in trouble or even face the risk of bankruptcy, and corporate employees may also become unemployed as a result.
It is not difficult to see from Japan's predicament that the harvest of the U.S. dollar against the yen this time reflects the use of the international status of the U.S. dollar by U.S. financial institutions to regulate and intervene in the global economy through its financial markets. By harvesting other countries, it Feed back its own economy and achieve its economic interests and political goals.
of this U.S. dollar interest rate hike extends far beyond Japan . The entire Asian region has basically become a victim of the U.S. dollar interest rate hike . The tightening of U.S. monetary policy has prompted investors to withdraw from Asian economies. This behavior has undoubtedly exacerbated the trend of Asian currency depreciation. As the pressure of capital outflows increases, Southeast Asian countries face the dual risks of shrinking foreign exchange reserves and damaging currency stability.
The rising pressure of currency depreciation not only pushes up import costs, but also intensifies price fluctuations, which has a considerable impact on the lives of local people. In addition, for those countries that rely on external debt, the increased debt burden caused by US dollar interest rate hikes will undoubtedly increase their fiscal pressure. Against the background of the global economy slowing down due to US dollar interest rate hikes , the export business of Southeast Asian countries has also been hit hard, which has had a negative impact on overall economic growth. Due to the decline in the yen exchange rate, Thailand became the first affected country.
There are approximately 5,400 Japanese companies operating in Thailand, and these Japanese companies account for 74% of Thailand’s exports. Thailand's export industry is extremely dependent on Japanese companies. If the Japanese yen's interest rate hikes at this time lead to the withdrawal of a large amount of foreign capital, Thailand's economy will be under tremendous pressure. This situation may trigger risks similar to the 1997 Asian financial crisis.
Thailand may become the "first victim" after the depreciation of the yen. As a developing country, Thailand's economic foundation is relatively fragile and difficult to cope with such a huge economic impact. Once Japanese companies choose to withdraw, Thailand's economy will face a devastating blow and may trigger economic turmoil throughout Southeast Asia.
Chetan, Asia economist at Morgan Stanley Ahya believes that the monetary policy stance of many Asian central banks will largely depend on the Federal Reserve's interest rate cuts . If the Fed delays cutting interest rates, the interest rate cutting cycle in Asian countries will be delayed accordingly. However, due to the significant fall in inflationary pressure in Asian countries, local real interest rates (nominal interest rates - inflation rates) have risen significantly. If Asian countries' nominal interest rates remain at a higher level for a longer period of time (because they do not want to cut interest rates before the Federal Reserve), the local economy will decline. The pressure may increase, which is also not conducive to the stability of Asian currency exchange rates.
The irresponsible and radical interest rate hike and contraction policies adopted by the United States are very likely to push the global financial market to the brink of a liquidity crisis, further exacerbating the difficulties of global economic recovery and increasing the risk of stagflation and recession. Multiple factors such as the sharp appreciation of the US dollar, the European energy crisis and the surge in global commodity prices are intertwined, making the global economy face greater inflationary pressure.
If the Federal Reserve and the central banks of developed countries around the world continue to raise interest rates and are unable to effectively manage inflation expectations, the global economy may fall into stagflation again, and may even erupt into a financial crisis more serious than that of 2008. In the current context, the United States should carefully consider the impact of its policies on the global economy, assume its due responsibilities, and avoid bringing greater uncertainty and risks to the global economy.
