"Strong Yen, Late but Healthy Adjustment" Former ECB President Dismisses Recession

Jean-Claude Trichet, Former ECB President
Causes: BOJ Tightening, Middle East Tensions, Employment Shock

Former European Central Bank (ECB) President Jean-Claude Trichet recently described the sharp rise in the yen's value as a "belated but healthy adjustment." He also dismissed concerns about a U.S. economic recession, stating that "there is no reason to panic."

Trichet appeared on CNBC's "Squawk Box Europe" on the 6th (local time) and explained the background of the recent global stock market crash. He analyzed, "The combination of Japan's shift to a tightening monetary policy, geopolitical tensions in the Middle East, and disappointing U.S. job data shook markets worldwide last Friday and Monday."

Jean-Claude Trichet, former President of the European Central Bank (ECB) [Photo by London Speaker Bureau]

He continued, "Each of these three factors played a role in triggering the adjustment of the dollar-yen exchange rate," adding, "It is a late but healthy adjustment. We all knew the yen was undervalued, and the yen carry trade had been very active for a long time."

Among global investors, the yen carry trade?borrowing low-interest Japanese yen to invest in overseas assets?had been popular. However, on June 31, the Bank of Japan (BOJ) raised its short-term policy rate to 0.25%, prompting a full-scale unwinding of the yen carry trade. The dollar-yen exchange rate, which had surged to 161.65 yen in early July, is now moving around the 144.52 yen level. This represents a drop of over 10% in just about a month. A decline in the exchange rate means an appreciation of the yen.

Wall Street points to capital outflows caused by the unwinding of the yen carry trade as one of the main reasons for the recent global stock market crash. Kit Jucks, Chief FX Strategist at Soci?t? G?n?rale, noted, "To unwind carry trades at an unprecedented scale, some people are bound to suffer significant losses." According to the U.S. Commodity Futures Trading Commission (CFTC), investors' bearish yen contracts, which exceeded 180,000 contracts (equivalent to about $14 billion in net assets) in early July, have sharply decreased to about $6 billion as of last week.

Former President Trichet also addressed concerns about a U.S. recession. He said, "While caution is necessary, there is no reason to panic about the U.S. economic situation," pointing out that the U.S. Composite Purchasing Managers' Index (PMI) remained in the growth territory in July. Earlier, S&P Global reported that the U.S. Composite PMI for July was 54.3, slightly down from 54.8 in the previous month. A reading below 50 indicates economic contraction, while above 50 indicates expansion.

Meanwhile, on the same day, the three major indices on the New York Stock Exchange closed up around 1%, recovering from the sharp declines the previous day. This was attributed to the assessment that fears of a recession caused by the employment shock were exaggerated and the easing of panic selling. The Tokyo Stock Exchange's record-breaking gains the previous day were also seen as contributing to the recovery of investor sentiment.

This content was produced with the assistance of AI translation services.