Yen Hits 37-Year Low Amid Deepening US-China Monetary Policy Divergence

The Yen’s Historic Depreciation and Deepening Policy Divergence Between China and the U.S.: A Mirror Signal of Global Capital Reallocation

USD/JPY officially broke below 161.96 in late June 2024—the lowest level since December 1986. This figure is far more than a technical milestone; it marks a clear policy watershed. It signals that monetary policy cycles between the Bank of Japan (BOJ) and the U.S. Federal Reserve (Fed) have fully decoupled: on one side, U.S. Treasury yields continue to oscillate near their elevated level of 4.3%, with no sign of easing the pace of quantitative tightening; on the other, the BOJ—facing uncertain inflationary momentum (“fictitious heat”) and questionable sustainability of wage growth—remains committed to its Yield Curve Control (YCC) framework, holding the 10-year JGB yield ceiling at approximately 1.0%. This structural misalignment is reigniting carry trades, rendering the yen the world’s cheapest funding currency and accelerating its depreciation spiral.

Policy Decoupling: From “Timing Gap” to “Directional Divergence”

Markets had earlier anticipated that the BOJ would initiate a genuine interest-rate hike—or at least exit YCC—in spring 2024. However, April’s CPI rose only 2.8% year-on-year (core CPI: 2.6%), while “core-core” inflation—excluding fresh food and energy—stood at just 1.6%, well below the 2% target. Although nominal wages grew 2.9% year-on-year in May, real wages have declined for 27 consecutive months. Against this backdrop, the BOJ maintained its policy unchanged at its June policy meeting and emphasized the need to “confirm the sustainability of a virtuous cycle between prices and wages.” Meanwhile, the Fed’s June FOMC minutes explicitly stated: “Inflation remains stickier than expected; more evidence is needed before considering rate cuts,” with the dot plot indicating less than a 50% probability of even a single cut this year. Policy trajectories have thus evolved from “differences in timing” to “directional divergence”: the Fed anchors its stance on fighting inflation, while the BOJ anchors on preventing deflation. As the world’s most quintessential “low-rate + high-debt” currency, the yen’s depreciation momentum has shifted decisively from technical drivers to fundamental ones.

Carry Trades Reignite: Yen Funding Costs Approach Zero, Global Leverage Creeps Up

The yen’s overnight uncollateralized call rate (TONA) currently stabilizes within the 0.05%–0.10% range, while the 3-month USD LIBOR remains above 5.3%—a staggering spread of 520 basis points. According to Bloomberg data, as of June 20, cross-border yen-denominated carry positions totaled $1.2 trillion—a 37% increase from year-end. Capital flows follow a classic three-step pattern: first, borrowing ultra-cheap yen; second, converting them into dollars to purchase U.S. Treasuries or equities; third, hedging FX risk via derivatives. Yet hedging costs themselves have surged significantly, as the USD/JPY one-month implied volatility breached 25%. Consequently, some hedge funds are opting for “naked long USD/JPY” positions—amplifying one-way bets. Notably, such trades are spilling over into emerging markets: foreign ownership stakes in Hong Kong and mainland Chinese stocks within the MSCI Emerging Markets Index rose by 0.8 percentage points week-on-week during the third week of June, with northbound capital inflows reaching RMB 21.7 billion—its highest level in three months.

Chinese Assets Attract Capital Re-Entry: High-Elasticity Exposure Emerges as a “Substitute Safe Haven” Amid Dollar Strength

Against the backdrop of the U.S. Dollar Index holding steady above 105.5 and global risk assets under pressure, the Nasdaq Golden Dragon China Index (HXC) surged 2.37% on June 25—the largest daily gain in recent weeks—with Baidu (+5.1%), Bilibili (+4.8%), and Li Auto (+3.9%) leading the rally. This is not an isolated event but reflects foreign investors’ repricing of China’s “high-growth + policy catalyst + low valuation” triad: First, China’s May manufacturing PMI rebounded to 50.6, with the new export orders sub-index expanding for two consecutive months. Second, the State Council’s Executive Meeting on June 21 explicitly pledged to “expand the scope and intensity of large-scale equipment upgrades,” allocating over RMB 300 billion in central fiscal funds—directly benefiting industrial automation, semiconductor equipment, and new-energy supply chains. Most importantly, the Hang Seng Tech Index’s forward P/E ratio has fallen to 22.3x—placing it at the 15th percentile since 2020—offering markedly superior safety margins and upside potential compared to the Nasdaq-100’s 35.6x multiple. Investors are adopting a “barbell strategy”: holding U.S. Treasuries for yield stability on one end, and increasing exposure to Chinese tech stocks for alpha generation on the other.

Geopolitical and Industrial Variables: Accelerated Rebalancing Under Dual Pressure

Global capital reallocation is not driven solely by monetary policy. Israeli Defense Minister Yoav Gallant publicly declared that “targets inside Iran have been selected” and warned that “war could begin as early as tomorrow”—elevating geopolitical risk premiums and reinforcing gold and yen’s safe-haven attributes. Yet the yen’s sharp decline underscores how its role as a funding currency has now decisively eclipsed its traditional safe-haven function. Simultaneously, the Democratic Republic of Congo has mandated cobalt miners to utilize unused export quotas from the first half of the year, while Tesla announced a 20% year-on-year increase in Q2 EV deliveries—tightening global critical-mineral supply chains and further strengthening pricing power across the new-energy value chain. Meanwhile, U.S. capital markets are experiencing an AI-infrastructure financing boom: SpaceX helped propel total U.S. IPO and equity issuance volumes to $251 billion in the first half of 2024—the highest semiannual figure on record; AI infrastructure firms like Anthropic plan multi-billion-dollar IPOs starting in October. A portion of this incremental capital is flowing—via QFII, Shanghai-Hong Kong Stock Connect, and other channels—into Chinese AI-computing, data-center, and optical-module suppliers, where valuations offer greater appeal.

Cascading Effects of Cross-Border Capital Flows: Southbound Funds and RMB Exchange-Rate Management Under Strain

The yen’s collapse and the re-entry of capital into Chinese assets form a mirror image—reshaping Asia’s capital flow landscape. Daily net southbound inflows via the Stock Connect program averaged RMB 4.2 billion in June, up 65% from May’s average, with heightened concentration: the top ten most-traded stocks—including internet, consumer electronics, and semiconductor names—accounted for 78% of total turnover. This intensifies microstructural fragility in the Hong Kong market: the Hang Seng Index constituent turnover rate rose 23% month-on-month in June, yet the Liquidity Coverage Ratio (LCR) fell by 11 percentage points. For the RMB exchange rate, dual pressures are mounting: first, dollar strength continues to weigh on the CFETS RMB Index; second, foreign capital inflows boost demand for FX conversion—the June bank-client FX settlement surplus turned positive at $18.6 billion. On June 26, the People’s Bank of China conducted a RMB 40-billion reverse repo operation, stressing the need to “maintain reasonable and ample liquidity”—hinting that subsequent tools—including adjustments to the FX risk reserve requirement ratio or offshore PBOC bill issuances—may be deployed to smooth expectations. Yet policy space has narrowed substantially relative to 2022, making RMB expectation management materially more challenging.

Conclusion: Rebalancing Is Not the Endpoint—It Is the Prologue to a New Order

USD/JPY breaking below 162 is no transient noise—it is a pivotal marker signaling the global monetary system’s transition from “U.S. dollar hegemony” toward “multi-anchor stability.” When the BOJ cannot tighten without triggering a debt crisis, and when the Fed remains constrained by fiscal deficits and electoral politics from pivoting rapidly, carry trades become the market’s self-organizing rebalancing mechanism. In this process, Chinese assets are gaining not “passive benefits,” but rather an “active option”—earned through industrial upgrading and credible policy execution. Over the next three months, markets will closely monitor Japan’s July CPI data, the Fed’s July FOMC statement language, and the implementation progress of China’s equipment-upgrade policies. The true test lies not in exchange-rate digits themselves—but in whether nations can forge a sustainable new equilibrium between policy autonomy and financial stability.