A simple perusing of the markets this morning will arrive at the Japanese Yen. At an exchange rate of 149.70 to the US Dollar we are near to a potential nexus point as we get rather near to the levels at which the Bank of Japan intervened last year. Also as we look at the land of the rising sun or Nihon we see a case of this/
Meet the new boss
Same as the old boss ( The Who)
This is because the Bank of Japan announced this.
The Bank of Japan will conduct an additional outright purchase of Japanese government bonds (JGBs) on October 4, 2023 as follows.
(Maturity) More than 5 years and up to 10 years .
So the Bank of Japan is adding to its QE operations as quite a few other central banks are engaging the reverse gear of QT. Whilst this is not explicit Yield Curve Control it is implicit as it acts to slow and in this instance stop rises in Japanese Government Bond yields. The present line in the sand appears to be 0.76%. I am assuming they really meant 0.75% but markets moved too quickly which makes me have a wry smile at the use of the word nimble below.
The Bank will make nimble responses by, for example, conducting additional outright purchases of JGBs and the Funds-Supplying Operations against Pooled Collateral, taking account of market conditions.
Anyway they are threatening further extra operations. So we have a case of economics 101 in a sense of an expansion of the money supply pushing a currency lower. If we stay withing the JGB market we see that a yield of 0.75% compares with 3% in Germany, 4.5% in the UK, 4.6% in the US and 4.8% in Italy this morning. So Japan has a much lower bond yield and if we look back to the end of July and the excitement over a change of policy we see that not much has changed as it has allowed its ten-year yield to rise by 0.3%.
Actually you could argue there is a much harsher undercut because the US ten-year yield has risen by more like 0.6% or around twice as much. So relatively the Japanese yield has fallen. On that road we see why the Yen is weak
Intervention?
One signal that Tokyo may be warming up for this is already happening as we see some open mouth operations.
TOKYO (Reuters via PiQSuite.com) – Japan’s Chief Cabinet Secretary Hirokazu Matsuno said on Monday the government would continue to monitor currency moves with “a high sense of urgency”…….Earlier in the day, Japanese Finance Minister Shunichi Suzuki said he was watching currency moves “cautiously”, Bloomberg News reported.
Why well the heat is on. The emphasis is mine.
While the year-on-year rate of increase in the CPI has continued to exceed 2 percent, the main reason for this is still the pass-through of the rise in import prices to consumer prices. There is a possibility that persistence of a prolonged pass-through of this rise will lead to the rate of increase in the CPI continuing to deviate upward from the baseline scenario for some time.
This is from the Bank of Japan summary of opinions released this morning. Whilst their inflation level has been lower than pretty much everywhere it is high for it and real wages have continued to fall.
A positive wage-setting stance has started to spread among firms.
Remember rather than a “stance” this was supposed to be a reality with us now being in a period of
a virtuous cycle that leads to inflation
accompanied by wage increases seems to have started to emerge.
Not in reality. Anyway you do not have to take my word for it as a few short paragraphs later we see “And it’s gone” as South Park would say.
,accompanied by wage increases, has not yet come in sight……..it is necessary that wage increases take root
There is another side to the foreign exchange sword which is the depreciation/devaluation element to improve trade. Or what was one of the arrows of Abenomics. The pandemic took the Yen back to roughly where that started and conveniently to around 100 on the BIS real exchange rate index. As of August the monthly update was 73.19 and we know the Yen is again under pressure.
Trade Figures
We often look at economic developments via a Turning Japanese theme well let me spin that round because we are seeing a sort of British style policy. A trade deficit.
Japan’s trade deficit in H1 ’23 is on par with ’11 right after Fukushima. Japan – like the Euro zone – faces a negative terms of trade shock from rising energy prices. Unlike the Euro zone, where trade-weighted Euro is at all-time highs, Yen weakness is offsetting this shock… ( @RobinBrooksIIF)
He was comparing with the Euro are but let me look at it via a British lens. A trade deficit (check), being dealt with via a currency depreciation ( check). providing some growth ( check) but also inflation ( check). Not everything works as for example Japan has of course large reserves from the many years of trade surplus but on the other hand and this is even more bad news for the rhetoric of the Bank of England and its claims that the UK was affected the most Japan s being hit hard by the cost of its energy imports.
That will be in play again as we note the recent rise in the price of crude oil with the Brent benchmark at US $93 per barrel as I type this. Also natural gas prices have been rising in Europe and whilst this is a regional market will impact an importer like Japan to some extent.
Comment
On Friday Governor Ueda spoke about the Bank of Japan balance sheet and we get an indication of its size bu the fact the speech was 26 pages long. He presented a view that the Bank of Japan is a money making machine.
First, the Bank’s income has been on an increasing trend.
Interest income on the government bonds has been rising following the increase in the purchases of long-term JGBs. In addition, the dividends received from its holdings of ETFs and other assets have grown to a sizable amount over the past few years.
Well played the Bank of Japan. On Wednesday when they buy the extra bonds they will get 0.75% or so a year and only pay their interest-rate of -0.1%. So more profits.
Except there is a catch. FRB is the US Federal Reserve.
For example, the FRB, like the Bank of Japan, uses the amortized cost method and discloses
unrealized gains/losses as reference information. As of March 31, 2023, the FRB held substantial unrealized losses on its bond holdings, amounting to 0.9 trillion dollars.
However, this does not directly affect its actual profits/losses, as in the case of the Bank of
Japan.
As you can see the Bank of Japan ignores marked to market losses. If I owned so many JGBs I might be tempted to do that as well but of course I would go straight to jail. Even under current policy they have large losses at a benchmark yield of 0.75%. Imagine what they would be if Yield Curve Control stopped and interest-rates rose and you quickly come to the conclusion that fears over its balance sheet have been a factor on the Bank of Japan not raising interest-rates.
Even in an area where it has profits on the same basis which is its ETF equity holdings. How does it take them without torpedoing the market? To the whole mix we may soon be seeing intervention in yet another market if the Yen weakens again.
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Shaun, its good to see you are oj top of it. The JP bond and the US Govt shutdown both reflect a failure of statehood.
The US government is planning on raising the budget ceiling by 8% every year for the foreseeable future, will the Fed counter this witĥ commensurate increases in rates to counter act the inflationary consequences?
Hi Kevin
One of your favourite subjects the US bond market does not like it that much with the ten-year yield rising to 4.7% this evening. That puts even more pressure on the Yen which has held in there today. I wonder if they have been using the BIS for some backdoor intervention or whether the markets are biding their time?
Thank you Paul C.