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Net foreign asset positions and appreciation expectations on the Swiss franc and the Japanese Yen

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The paper shows that currencies of countries with persistent current account surpluses and high foreign-currency denominated assets, such as the Swiss franc and the Japanese yen, are under persistent appreciation pressure, particularly when the centres of the world monetary system follow expansionary monetary policies. This limits the choice of exchange rate regime. Given flexible exchange rates, a negative risk premium on the domestic interest rate can emerge. Empirical estimations provide mixed evidence for a negative impact of net foreign asset positions and exchange rate uncertainty on interest rates of international creditor countries at the periphery of the world monetary system.

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Fig. 1

Source: Pacific Exchange Rate Service

Fig. 2

Source: IMF, Reuters/Thomson, Federal Reserve, Swiss National Bank. Long-term is approximated by 10-year government bonds yields, short-term is approximated by money market rates

Fig. 3

Source: IMF, ECB, Reuters/Thomson, Pacifics Exchange Rate Service

Fig. 4

Source: OECD, IMF, Swiss National Bank

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  1. Kugler and Weder (2009) reconsider this effect.

  2. Investing in time t one unit of saving in home has a return of 1 + iCH (1 + iJap) after the end of the investment period in t + 1. For one unit invested in the euro area, the return in domestic currency at the end of the investment period is ((1 + iEA(US))/et)*et + 1) with e being the exchange rate between the Swiss franc and the euro (between the Japanese yen and the US dollar) in price notation.

  3. This assumption corresponds to the regional currency habitat in the world economy. Whereas in Europe (and some neighbouring countries) the euro is the dominating international medium of exchange, unit of account, store of value, anchor currency, intervention currency and reserve currency, the dollar is the dominating international currency in the rest of the world (McKinnon 2013).

  4. The equilibrium condition for the Swiss investor is 1 + iCH = ((1 + iEA)/et)*et + 1) which is equivalent to the uncovered interest rate parity as in equation (1). Empirical evidence on the uncovered interest rate parity is mixed (see for instance Wu and Show-Lin 1998, Chinn 2005, Lothian and Wu 2011).

  5. Germany (euro area) is assumed to be a net debtor country versus Switzerland and in absolute terms a larger net creditor country versus the rest of the world. This implies an overall international creditor position for Germany (euro area).

  6. In Japan, this trend halted with the introduction of Abenomics, starting in January 2013.

  7. For details see McKinnon and Ohno (1997) as well as Danne and Schnabl (2008).

  8. For a historical overview of exchange rate policies including Switzerland and Japan see Bordo et al. (2012).

  9. Given a starting point in year 1, the net foreign asset position in year n is equivalent to the accumulated current account positions up to the year n: \( {NIIP}_n={\sum}_{s=1}^n{CA}_s \)

  10. In this context, Lane and Milesi-Feretti (2005) stress that also revaluation effects matter. The change in the net international investment position NIIP is equivalent to the current account (CAt) and revaluation effects RVt: NIIP t  − NIIP t − 1 = CA t  + RV t . Revaluation effects can originate in changes in foreign asset prices and exchange rate changes.

  11. Note that in Japan, following the 2011 tsunami disaster, current account surpluses declined as energy imports have increased.

  12. This analysis focuses on aggregated net international investment positions. Joyce (2015) takes a closer look on the compositions of net international investment positions disentangling the asset and liability side as well as different forms of international assets such as FDI.

  13. Brown et al. (2009) provide a detailed overview of the currency composition of Swiss international assets. Since the turn of the millennium Swiss and Austrian banks (by borrowing from Swiss banks) have issued substantial amounts of Swiss franc credit in many central and eastern European economies as well as in Germany (mainly held by local public entities). By Swiss franc lending the Swiss and Austrian banks could circumvent the exchange rate risk of international lending. The Swiss franc appreciation shock in early 2015 revealed, however, that this type of lending transforms currency risk into default risk (McKinnon and Schnabl 2004a, b). In case of a strong appreciation of the creditor currency the credit taking households, enterprises and local public entities are threatened by default. In some central and eastern European countries policy makers have shifted the costs of the revaluation effects of the franc appreciation back to banks.

  14. This is coined “Conflicted Virtue” by McKinnon and Schnabl (2004b), as a complementary expression to “Original Sin” as put forward by Eichengreen and Hausmann (1999). Countries such Japan, Switzerland and China are virtuous because of their high saving rates. The resulting current account surpluses and rising foreign-currency denominated international creditor positions create, however, the curse of persistent appreciation pressure and foreign exchange risk.

  15. This is regarded as a mercantilist trade strategy. See for instance Dooley et al. (2004).

  16. In the portfolio balance model by Branson (1977) investors have a preference for domestic assets in face of exchange rate uncertainty, and hold foreign assets only for a risk premium. The portfolio balance model can also explain why – as in the case of Japan – the currency of a country with a persistently positive current account balance follows an appreciation trend: An (expansionary) monetary policy shock causes the domestic interest rate to depreciate beyond the long-term equilibrium, which implies a continuous appreciation path which goes along with a positive current account position.

  17. See Calvo and Reinhart (2002) for this asymmetry of the world monetary system.

  18. Austria, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxemburg, Netherlands, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, Switzerland and United Kingdom.

  19. Lane and Milesi-Feretti (2001) use nominal exports for normalization. They argue that normalizing by GDP or alternatively by exports does not significantly change the econometric estimation results.

  20. We do not assume a systematic impact of the interest rate differential on exchange rate uncertainty.


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We thank Hannes Böhm, Talina Sondershaus and David Herok for excellent research assistance. We thank Eiji Ogawa, the participants of the 2015 EEFS conference in Brussels and the participants of the Hitotsubashi research seminar in Tokyo for useful comments.

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Correspondence to Sophia Latsos.

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Latsos, S., Schnabl, G. Net foreign asset positions and appreciation expectations on the Swiss franc and the Japanese Yen. Int Econ Econ Policy 15, 261–280 (2018).

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