The pace of action is picking up and again we find ourselves looking East to the Pacific where economic events are in motion. I will look at the Bank of Japan statement in a bit but we can infer it from the response to it as explained by the Japanese owned Financial Times.
The yen fell to a new 34-year low on Friday after the Bank of Japan held interest rates near zero, despite rising pressure on the central bank to tighten its policy to prop up the currency. The Japanese currency fell to ¥156.13 against the dollar….
In fact it went as low as 156.82 this morning. What we are seeing here is the same forces at play that forced Bank Indonesia to raise interest-rates on Wednesday. The rise in US bond yields with the two-year passing 5% yesterday is applying what Hard-Fi described like this.
Can you feel it?
Feel the pressure…
Pushing down on me, oh, Lord!
Pressure, pressure
Pressure pressure pressure
On Wednesday I did point out that the Japanese authorities were taking quite a risk with statements like this.
JAPAN’S OCHI: USD/JPY MOVE TO 160 COULD TRIGGER ACTION; NO ACTIVE DISCUSSION YET ( @DeltaOne)
So let us take a look at what the Bank of Japan had to say.
Bank of Japan policy announcement
As you can see it is really rather brief.
At the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period:
The Bank will encourage the uncollateralized overnight call rate to remain at around 0 to
0.1 percent.Regarding purchases of Japanese government bonds, CP, and corporate bonds, the Bank will conduct the purchases in accordance with the decisions made at the March 2024 MPM.
Actually I quite approve of a brief statement as central bankers often waffle on these days. But the crux of the matter is that interest-rates are unchanged and thus the gap to international ones and the US Dollar in particular remains very wide. We can look at it in terms of the two-year yield as currency players often park money in short-dated bonds and with Japan having a 0.3% bond yield we see a 4.7% gap with the US. Even economics 101 realises that you expect a lower exchange-rate from this.
The Financial Times expresses the official position below.
In March, the central bank ended its negative interest rate policy, raising borrowing costs for the first time since 2007. In the wake of this historic shift to end its ultra-loose monetary policy, governor Kazuo Ueda has indicated he would like to move gradually to raise rates.
But rhetoric about an “historic shift” changed the maths by a mere 0.1% as traders do their calculations and with higher US bond yields in fact the situation is now worse.
Over to You Bank of Japan
Perhaps the new currency level suggested a loss of face as Bank of Japan Governor Ueda was speaking as we saw this.
BREAKING: YEN SWINGS FROM LOSSES TO GAINS IN SHARP MOVE. ( @financialjuice )
Some players got really rather excited.
JAPAN MOF TROLL ASS INTERVENTION
JPY SPIKE XXX
JPY 150-200 PIP DROP ( @Capital_Hungry )
For perspective let me take you back to March 29th.
“I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the US,” said Masato Kanda, vice finance minister for international affairs, in an interview Friday. “Many people think the yen is now moving in the opposite direction of where it should be going.” ( Bloomberg)
As Kanda-san is the man making the decisions here his thoughts are rather troubling. He has got the direction of monetary policy the wrong way around. I wonder who the “many people” are outside of his dinner guests? Not those who actually trade the currency as it was at 151 back then and the same Bloomberg article noted this.
The yen has lost about 7% this year against a broadly advancing dollar, making it among the weakest major currencies.
Also we see the problem with making grand statements.
“We are currently monitoring developments in the foreign exchange market with a high sense of urgency,” said Kanda. “We will take appropriate measures against excessive foreign exchange moves without ruling out any options.” ( Bloomberg)
You might be thinking he has acted today Shaun. But as I have been typing this the currency markets have returned the Japanese Yen to 156.66. So it was like a brief shower on a summer’s day and it was gone. It feels like the Bank of Japan was sent in to check prices but did not take the advice proffered back in the day by Nils Lofgren.
(Back it up baby) I found out love just ain’t enough
I need devotion to back it up (Back it up now)
I found out love just ain’t enough (Back it up baby)
I need devotion to back it up (Back it up now)
Comment
Let us now switch to the Japanese economy and we can start with a bit of an irony.
The core consumer price index (CPI) in Tokyo, a leading indicator of nationwide figures, increased 1.6% in April from a year earlier, slowing from a 2.4% gain in March. It was much lower than a median market forecast for a 2.2% rise.Services prices rose 1.6% in April from a year earlier, slowing from 2.7% in March, due largely to the Tokyo metropolitan government’s decision to make some tuition free, the data showed. ( Reuters)
As you can see there was a government intervention via an education subsidy but the leading indicator for Japanese inflation suggests it will be below the 2% target. Looking ahead there are upwards influences from the Yen decline and higher price of crude oil but at least Japan is facing it from a lower base.
As to economic growth the Bank of Japan is more downbeat.
Comparing the projections through fiscal 2025 with those presented in the previous Outlook Report, the projected real GDP growth rate for fiscal 2023 is lower, mainly
reflecting lower private consumption due in part to the effects of the suspension of production and shipment at some automakers. The projected growth rate for fiscal 2024 is somewhat lower, given that the GDP growth rate for the second half of fiscal 2023 is expected to be fairly lower than previously projected. The rate for fiscal 2025 is more or
less unchanged.
That is a lot of words to essentially say 1% per annum and remember it thinks that is fast.
Japan’s economy is likely to keep growing at a pace above its potential growth rate.
If we take all of this in the round there are consequences. I doubt many will be reporting that at 196 versus the Japanese Yen the UK Pound £ is now above pre-Brexit levels. Plus there is the issue of the currency war between the Chinese Yuan and the Yen. Here is how the Asahi Shimburn is covering the changes.
In February, Toyosu Senkyaku Banrai, a commercial facility with more than 50 eateries, opened on Tokyo’s waterfront, adjacent to the Toyosu Market.
When the line-ups of expensive menu items were revealed, many Japanese quickly made fun of them on social media, naming them “inbaun-don” (inbound-donburi)……..
Poh Meng Quek, 52, who came from Singapore, was enjoying a 2,900-yen kaisen-don at the facility with his work colleague Suzanne Lim, 63.
“It is very nice to be able to eat fresh, delicious fish at such a reasonable price,” Poh said.
He came to Japan before the COVID-19 pandemic. This time, Poh said, it felt comparably inexpensive, which is why he was frequently splurging on a taxi.