Chinese Taking Advantage of Yen Weakness as Domestic Retail Struggles

As the Chinese central bank slashes interest rates in a bid to save its floundering economy, and the Bank of Japan continually intervenes to the tune of billions to save its dying yen, wealthy Chinese consumers are headed in droves to Japan to take advantage of the exchange rate and load up on fancy goods. And with retailers in China already struggling, losing huge amounts of revenue to exchange rate tourists has made an existing problem even worse.

In Japan, the BoJ keeps pumping up its currency, with several admitted manipulations including moves that coincide with the blips on the below chart. Nothing seems to be enough to “save” the yen from trending back toward its 2024 lows, with a doom loop seemingly in full swing.

Yen vs USD, 6-Month

Source

But the Chinese upper classes aren’t complaining. They’re flying to Japan to take advantage of the best yuan-yen exchange rate in almost a quarter century, going home with far more luxury goods than they could buy domestically for the same wad of cash. So much so that the cost of travel is worth it, especially if they’ll be loading up on enough expensive items which would be significantly pricer at home. Against the dollar, the yen has crashed even further, with the lowest exchange rate in 38 years.

With middle-class Chinese consumers spending less due to a collapse in confidence in the economy, and upper-class Chinese heading abroad to load up on luxury goods, retailers in China face a double-edged sword. Meanwhile, the country is on the brink of a housing meltdown after decades of rapid urbanization and expansion, spurning a slew of policy changes and state interventions that include the latest interest rate cut.

Even if the measures prevent a full-blown collapse in China, they’ll only kick the can down the road — just as the Fed is trying to do with its likely interest rate cut in September. However, it won’t work: inflation is still too high. There’s too much money sloshing around in the economy for an interest rate cut to have its intended effect without further devaluing the dollar in an already increasingly-unaffordable environment where rent, food, gas, insurance, cars, and other essentials are rapidly becoming more expensive. 

Delay cuts for too long, and the low rate-addicted banks and real estate markets quiver and fall from their paper foundations. But it isn’t just the US. China, too, is stuck between a rock and a hard place, but the even more centralized nature of the Chinese government means it has more “tools” to intervene. Both countries, as well as other central banks around the world, face the same conundrum time and time again as they create boom and bust cycles with artificial credit expansion. 

Peter Schiff posed the question earlier this year about the Fed’s options:

“Does it fight inflation, which means much higher rates than the rates we have now (the rates we have now are not high enough)? … Or will the Fed ignore the inflation problem and try to rescue the economy by creating more inflation?”

Several months later, the answer appears to be the latter. With the Fed all but declaring victory over inflation, market analysts now expect that a rate cut in the US is on the way this fall. But while the Fed has the ability to flood the world with petrodollars, giving it near-dictatorial power over levers that affect the global financial system, there’s an even more extreme overlap between public and private institutions in China. That means that the Chinese government has arguably more opportunities to micromanage its domestic economy than the US does.

And just as in the US, China’s efforts will ultimately be futile, even if they manage to delay the inevitable. The hubris of central bankers is to think they can control nature — or, in this case, a complex economy with a dizzying array of relationships occurring between a practically endless number of interdependent moving parts. In the end, it’s always the common folk who pay the largest price for their statist arrogance.