Where next for the Japanese Yen and the Bank of Japan?

As the third most traded currency the Japanese Yen is one of the bedrocks of the world economy. In spite of the size and strength of the Japanese economy the currency tail can wag the economy dog as we saw on the period of the “Carry Trade” and its consequences. For newer readers I looked at the initial impact back on the 19th of September 2016.

 Ironically if done on a large-scale as happened back in the day with the Swiss Franc and the Japanese Yen it lowers the currency and so not only is the interest cheaper but you have a capital gain. What could go wrong? Well we will come to that. But this same effect turned out to make things uncomfortable for both Japan and Switzerland as their currencies were pushed lower and lower.

At that point borrowers were having a party as the got a cheaper borrowing rate and a currency gain but the Japanese ( and Swiss) saw their currency being depressed. However the credit crunch ended that party as currency traders saw the risk and that people might buy Yen to cover the risk. Thus there was a combination of speculative and actual buying which saw the Yen strengthen from over 120 Yen to the US Dollar to below 80.

There were various impacts from this and starting in Japan life became difficult for its exporters and some sent production abroad as the mulled an exchange rate of around 78 to the US Dollar. For example some shifted production to Thailand. Looking wider the investors who remained in the carry trade shifted from profit to loss. On this road in generic terms the typical Japanese investor often described as Mrs. Watanabe was having a rough patch as in Yen terms their investments went being hit. Actually that is something of a generic over my career for Mrs Watanabe as timing of investments in say UK Gilts or Australian property has often been poor. Of course as it turns out property in Oz did work but you would have needed plenty of patience.

Enter the Bank of Japan

The next phase was a type of enter the dragon as the Bank of Japan in 2013 embarked on an extraordinary monetary stimulus programme. Under the banner of Abenomics that was designed to weaken the Yen although it was not officially one of the 3 arrows it was supposed to fire. For a while this worked as the Yen fell towards 125 to the US Dollar. But just as economics 101 felt it could celebrate a rare triumph the Yen then strengthened again and actually rallied to 101 in spite of negative interest-rates being deployed  leading to yet another new effort called QQE and Yield Curve Control in September 2016.

So we see that Japan had some success in weakening the Yen but that then ended and even with negative interest-rates and the purchases by the Bank of Japan below there was a fizzling out of any impact.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

But you see these things have unintended consequences as Brad Setser points out below.

Japanese investors have been big buyers of foreign bonds—and U.S. bonds in particular. The lifers, the Japanese government through the government pension fund (GPIF), the Japanese government through Post Bank (which takes in deposits and cannot make loans so it buys foreign bonds since it cannot make money buying JGBs), and Norinchukin*

So a policy to weaken the Yen has a side-effect of strengthening it and even worse makes the global financial system more risky. Back to Brad.

In broad terms, a number of Japanese financial institutions have become, in part, dollar based intermediaries. They borrow dollars from U.S. money market funds, U.S. banks, and increasingly the world’s large reserve managers (all of whom want to hold short-term dollar claims for liquidity reasons) and invest in longer dated U.S. bonds.

What about now?

Things are rather different to this time last year when we were trying to figure out what had caused this?

The Japanese yen soared in early Asian trading on Thursday as the break of key technical levels triggered massive stop-loss sales of the U.S. and Australian dollars in very thin markets. The dollar collapsed to as low as 105.25 yen on Reuters dealing JPY=D3, a drop of 3.2 percent from the opening 108.76 and the lowest reading since March 2018. It was last trading around 107.50 yen………. ( Reuters )

That was from January 3rd whereas overnight we see this.

The major was trading 0.1 percent up at 110.09, having hit a high of 110.21 earlier, its highest since May 23.  ( EconoTimes )

On its own this may seen the Governor of the Bank of Japan have a quiet smile and a celebratory glass of sake. But falls in the Yen are associated with something else which will please the head of The Tokyo Whale.

TOKYO (Kyodo) — Tokyo stocks rose Tuesday, with the benchmark Nikkei index ending above 24,000 for the first time since mid-December, as investor sentiment improved on expectations for further easing of U.S.-China trade tensions. ( The Mainichi)

The Mainichi seems to have missed the currency connection with this but no doubt Governor Kuroda   will be pointing out both thresholds to Prime Minister Shinzo Abe.

Has something changed?

On Monday JP Morgan thought so. Via Forex Flow.

But because in recent years the yen is no longer being sold off in the first place, it is not acting as much like a safe-haven currency as in the past.

Okay so why?

if interest rates increase in other countries (opening a wider gap with rates in Japan)

Well good luck with that one! Maybe some day but the credit crunch era has seen 733 interest-rate cuts. However the Financial Times has joined in.

First, Japan is running trade deficits, which would imply a weaker currency. Second, domestic asset managers are busy buying higher-yielding foreign assets. Third, Japanese companies, confronting a chronic shortage of decent ways to deploy their capital at home, are increasingly spending it on deals overseas.

The last point is a really rather devastating critique of the six years of Abenomics as one of the stated Arrows was for exactly the opposite. Also there us more trouble for economics 101 as a lower Yen has seen a trade surplus switch to a deficit. Actually I think that responses to exchange rate moves can be very slow and measured in years so with all the ch-ch-changes it is hard to know what move is in play.


There is much to reflect on here. For example today may be one to raise a smile at the Bank of Japan as it calculates the value of its large equity holdings and sees the Yen weaken across a threshold. But it is also true that exactly the same policies saw the “flash rally” of over a year ago. In addition we see that the enormous effort in play to weaken the Yen has seen compensating side-effects which raise the risk level in the international finance system. Really rather like the Carry Trade did.

A warning is required because in the short-term crossing a threshold like 110 Yen sees a reversal but we could see the Yen weaken for a while. This is problematic with so many others wanting to devalue their currency as well with the Bank of England currently in the van. From a Japanese perspective this will be see as a gain against a nation they have all sorts of issues with.

“China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability,” US Treasury Secretary, Steven Mnuchin, said.

President Donald Trump has repeatedly accused China of allowing the value of the yuan to fall, making Chinese goods cheaper.

But, on Monday, the US said that the value of the yuan had appreciated since August, at the height of the trade war. ( BBC )

How will that play out?




What are the consequences of a weak US Dollar?

So far 2018 has seen an acceleration of a trend we saw last year which is a fall in the value of the US Dollar. The latest push was provided by the US Treasury Secretary only yesterday at Davos. From Bloomberg.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. The currency’s short term value is “not a concern of ours at all,” he said.

“Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.

The way it then fell it is probably for best its value is not a concern as the rhetoric was both plain and transparent.

A day before Trump’s scheduled arrival in the Swiss ski resort of Davos for the World Economic Forum’s annual meeting, Treasury Secretary Steven Mnuchin endorsed the dollar’s decline as a benefit to the American economy and Commerce Secretary Wilbur Ross said the U.S. would fight harder to protect its exporters.

The response to the words is a pretty eloquent explanation of why policy makers have a general rule that you do not comment on the level of the exchange rate. Not only might you get something you do not want there is also the issue of being careful what you wish for! Sadly the Rolling Stones were not on the case here.

You can’t always get what you want
But if you try sometime
You’ll find
You get what you need

However you spin it we are in a phase where the US government is encouraging a weaker dollar as part of the America First strategy. It has already produced an echo of the autumn of 2010 if this from the Managing Director of the IMF is any guide.

 “It’s not time to have any kind of currency war,” Lagarde said in an interview with Bloomberg Television.

Criticising someone for rhetoric by upping the rhetoric may not be too bright. Also there are more than a few examples of countries trying to win the race to the bottom around the world.

What does a lower US Dollar do?

Back in November 2015 Stanley Fischer gave us the thoughts of the US Federal Reserve.

To gauge the quantitative effects on exports, the thick blue line in figure 2 shows the response of U.S. real exports to a 10 percent dollar appreciation that is derived from a large econometric model of U.S. trade maintained by the Federal Reserve Board staff. Real exports fall about 3 percent after a year and more than 7 percent after three years.The gradual response of exports reflects that it takes some time for households and firms in foreign countries to substitute away from the now more expensive U.S.-made goods.

Also imports are affected.

The low exchange rate pass-through helps account for the more modest estimated response of U.S. real imports to a 10 percent exchange rate appreciation shown by the thin red line in figure 2, which indicates that real imports rise only about 3-3/4 percent after three years.

This means that the overall economy is affected as shown below.

The staff’s model indicates that the direct effects on GDP through net exports are large, with GDP falling over 1-1/2 percent below baseline after three years. Moreover, the effects materialize quite gradually, with over half of the adverse effects on GDP occurring at a horizon of more than a year.

Okay we need to flip all of that around of course because we are discussing a lower US Dollar this time around. Net exports will be boosted which will raise economic output or GDP over time.

How much?

If we look at the US Dollar Index we see at 89.1 it has already fallen by more than 3% this year. The recent peak was at just over 103 as 2016 ended so we have seen a fall of a bit under 14%. The official US Federal Reserve effective exchange rate has fallen from 128.9 in late December 2016 to 116.8 at the beginning of this week so 116 now say. Conveniently that gives us a fall of the order of 10%.

So if we look up to the preceding analysis we see that via higher exports and reduced imports US GDP will be 1.5% higher in three years time than otherwise.

What about inflation?

There is a lower impact on the US because of the role of the dollar as the reserve currency and in particular as the currency used for pricing the majority of commodities.

While the Board staff uses a range of models to gauge the effect of shocks, the model employed in figure 4–as well as other models used by staff–suggests that the dollar’s large appreciation will probably depress core PCE inflation between 1/4 and 1/2 percentage point this year through this import price channel.

You may note that Stanley Fischer continues the central banking obsession with core inflation measures when major effects will come from food and energy. It would be entertaining when they sit down to luncheon to say that we are having a core day so there isn’t any! Have you ever tried eating an i-pad?

So inflation may be around 0.5% higher.

What about everybody else?

The essential problem with reducing the value of your currency to boost your economy via exports is that overall it is a zero-sum game. As you win somebody else loses.  So the gains are taken from somebody else as no doubt minds in Beijing, Tokyo and Frankfurt are thinking right now. Of course pinning an actual accusation on the United States is not easy because of its persistent trade deficits.

Furthermore the exchange-rate appreciation seen elsewhere will not be welcomed by the ECB ( European Central Bank) and particularly the Bank of Japan. The latter is pursuing an explicit Yen depreciation policy to try to generate some inflation whereas what it has instead seen is a rise towards 109 versus the US Dollar. Of course workers and consumers will have reason to thank the lower dollar as lower inflation will boost their spending power.

Later today we will see how Mario Draghi handles this at the ECB policy meeting press conference. He finds himself pursuing negative interest-rates and still substantial if tapering QE and a stronger currency. It is hard for him to be too critical of the US though when even Christine Lagarde is saying this.


Of course that takes us back to a past competitive depreciation which Germany arranged via its membership of the Euro.


There is a fair bit to consider here. As it stands it looks as though the US economy will benefit over the next 3 years (convenient for the political timetable) by around 1.5% of GDP at the cost of higher inflation of 0.5%. There are two main problems with this type of analysis of which the first is simply the gap between theory and reality. The smooth mathematical curves of econometrics are replaced in practice by businesses and consumers ignoring moves for as long as they can and then responding but by how much and when? So we see a succession of jump moves. The other issue is that exchange-rates are usually on the move and can change in an instant unlike economies leaving us wondering which exchange-rate they are responding too?

Next we have the awkward issue of a country raising interest-rates and seeing a currency depreciation. Theory predicts the reverse. I have a couple of thoughts on this and the first is about timing. In my opinion exchange-rates these days move on expectations of an event so they have already happened before it does. So the current phase of interest-rate rises was reflected in the US Dollar rise from the summer of 2014 to the spring of 2015. That works because if anything we have seen fewer rate rises than expected back then and the bond market has fallen less. As to the Federal Reserve well with the US Dollar here and inflation with a little upwards pressure it will therefore find a scenario which makes it easy for it to keep nudging interest-rates higher.

Meanwhile there are other factors which are hard to quantify but seem to happen. For example a lower dollar coming with higher commodity prices. Hard to explain and of course there are other factors in play, But it seems to have happened again.

Me on Core Finance TV




Are the currency wars still raging?

One of the features of the post credit crunch era is that economies are less able to take further economic stress. This leads us straight into today’s topic which is the movements in exchange rates and the economic effects from that. Apart from dramatic headlines which mostly concentrate on falls ( rises are less headline grabbing I guess…) the media tends to step back from this. However the central banks have been playing the game for some time as so many want the “cheap hit” of a lower currency which is an implicit reason for so much monetary easing. The ( President ) Donald was on the case a couple of months ago. From the Financial Times.

“Every other country lives on devaluation,” said Mr Trump after meeting with US motor industry executives. “You look at what China’s doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies.”

Actually the FT was on good form here as it pointed out that perhaps there were better examples elsewhere.

South Korea has a current account surplus of nearly 8 per cent of gross domestic product, according to the International Monetary Fund, compared with just 3 per cent for China and Japan. Taiwan, meanwhile, has a colossal surplus of 15 per cent of GDP while Singapore is even higher at 19 per cent.

Care is needed here as a balance of payments surplus on its own is not the only metric and we do know that both Japan and China have had policies to weaken their currencies in recent years. So the picture is complex but I note there seems to be a lot of it in the Far East.


Ironically in a way the Japanese yen has been strengthening again and has done so by 1% over the weekend as it as headed towards 110 versus the US Dollar. So the Abenomics push from 76 was initially successful as the Yen plunged but now it is back to where it was in September 2014. Also for perspective the Yen was so strong partly as a consequence of US monetary easing. Oh what a tangled web and that.

The Bank of Japan will be ruing the rise ( in Yen terms) from 115 in the middle of this month to 110.25 as I type this because it is already struggling with this from this morning’s minutes.

The year-on-year rate of change in the consumer price index (CPI) for all items less fresh food is around 0 percent, and is expected to gradually increase toward 2 percent, due in part to the upward pressure on general prices stemming from developments in commodity prices such as crude oil prices.

Even worse for the Bank of Japan and Abenomics – but not the Japanese worker and consumer – the price of crude oil has also been falling since these minutes were composed. Time for more of what is called “bold action”?


It is not that often on these lists because the currency manipulation move by Germany came via its membership of the Euro where it added itself to weaker currencies. But its record high trade surpluses provide a strong hint and the European Central Bank has provided both negative interest-rates and a massive expansion of its balance sheet as it has tried to weaken the Euro. So we see that an exchange-rate that strengthened as the the credit crunch hit to 1.56 versus the US Dollar is now at 1.086.

So the recent bounce may annoy both the ECB and Germany but it is quite small compared to what happened before this. Putting it another way if we compare to Japan then a Euro bought 148 year in November 2014 but only 120 now.

The UK

In different circumstances the UK might recently have been labelled a currency manipulator as the Pound £ fell. As ever Baron King of Lothbury seems keen on the idea as he hopes that one day his “rebalancing” mighty actually happen outside his own personal Ivory Tower. There is food for thought for our valiant Knight of the Garter in the fact that we were at US $2.08 when her bailed out Northern Rock and correct me if I am wrong but we have indeed rebalanced since, even more towards our services sector.

However it too has seen a bounce against the US Dollar in the last fortnight or so and at US £1.256 as I type this there are various consequences from this. Firstly the edge is taken off the inflationary burst should this continue especially of we allow for the lower oil price ( down 11.2% so far this quarter according to Amanda Cooper of Reuters). That is indeed welcome or rather will be if these conditions persist. A small hint of this came at the weekend. From the BBC.

Motorists will see an acceleration in fuel price cuts over the weekend as supermarkets take up to 2p off a litre of petrol and diesel.

Not everybody welcomes this as I note my sparring partner on BBC 4’s MoneyBox Tony Yates is again calling for higher inflation (targets). He will then “rescue” you from the lower living-standards he has just created….

The overall picture for the UK remains a lower currency post EU vote and it is equivalent to a 2.5% reduction in Bank Rate for those considering the economic effect. Meanwhile if I allow for today’s rise it is pretty much unchanged in 2017 in effective or trade-weighted terms. Not something in line with the media analysis is it?

South Africa

This has featured in the currency falling zone for a while now, if you recall I looked at how cheap property had become in foreign currencies. There had been a bounce but if we bring things right up to date there has been a hiccup this morning. From the FT.

The rand plunged almost 2 per cent in less than half an hour on Monday morning after the latest row between president Jacob Zuma and his finance minister Pravin Gordhan, only moments after it had risen to its highest level since July 2015.

Perhaps the air got a bit thin up there.

The rand has been the best-performing currency in the world over the last 12 months, strengthening more than 23 per cent against the dollar, but it has suffered a number of knock backs prompted by the president and finance minister’s battles.

Back to where it was in the late summer of 2015.


If we look at the crypto-currency then there has been a lot of instability of late. At the start of this month it pushed towards US $1300 but this morning it fell to below US $940 and is US $991 as I type this. Not for widows and orphans…


There is much to consider here as we wonder if the US Dollar is merely catching its breath or whether it is perhaps a case of “buy the rumour and sell the fact”. Or perhaps facts as you can choose the election of the Donald and or a promised acceleration in the tightening of monetary policy by the US Federal Reserve. But we see an amelioration in world inflation should this persist which of course combines as it happens with a lower oil price.

So workers and consumers in many countries will welcome this new phase but the Bank of Japan will not. Maybe both Euro area workers and consumers and the ECB can as the former benefit whilst the latter can extend its monetary easing in 2017 and, ahem, over the elections. Whilst few currencies are stable these days the crypto one seems out of control right now.

There are economic consequences of Brexit for the Euro area too

After looking mostly over the past few days about the likely economic future for the UK post Brexit it is time to widen the perspective and look at the implications more widely in Europe. As it and the UK go through a phase of what Chris Martin and Gwyneth Paltrow described as “consciously uncoupling” there are many implications across Europe. This was on the mind of ECB ( European Central Bank) President Mario Draghi yesterday as he spoke at its summer conference at Sintra Portugal. We do not know if he toasted absent friends as US Federal Reserve Chair Janet Yellen and Bank of England Governor Mark Carney were late withdrawals from summer camp. So no chianti and chat with Mario this summer for them!

Mario wants alignment

The speech was revealing in the fact that whilst it explicitly avoided the word Brexit there was an implicit theme which addressed it. Let me explain.

So we have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions.

This is quite a shift if you think about it. There was talk of aligning policy around currencies earlier this year but of course we have large economies both explicitly ( Japan) and implicitly ( China and the Euro area) trying to push their currencies lower. If we stay with the Euro area some would argue that the 80 billion Euros a month of QE and an official interest-rate of -0.4% have contributed to its fall. It’s trade-weighted exchange-rate has fallen from 104.5 in April 2014 to 94.43 now with the Brexit impact being around 0.5 of that. Just to explain whilst the Euro has risen against the UK Pound £ it fell against the US Dollar.

Still we do have a fall of the size Mario discussed in 2014.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

So he thinks it has raised inflation by circa 0.5% but you note that he does not mention economic growth here. That is because currency depreciations are very awkward for an economic entity which consistently posts current account surpluses.

The current account of the euro area showed a surplus of €329.5 billion (3.2% of euro area GDP) in 2015

After noting such factors it is hard to avoid the view that the phrase “exporting deflation” applies to the Euro area overall. Other nations and trading blocs may well be not entirely keen on “alignment” after the Euro area has already moved some chess pieces in its favour.


There was a clear attempt by Mario to shift the debate to world issues.

What I am saying here is that the same applies at the global level. We may not need formal coordination of policies. But we can benefit from alignment of policies. What I mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all; and a shared commitment to found our domestic policies on that diagnosis.

There are various problems here as I have just pointed out. How can the Euro fall against the Yen or Yuan whilst they are falling against it for example? In fact Mario Draghi sounds rather like he has borrowed the TARDIS of Dr.Who and jumped back to 2008 to talk to Martin Wolf of the Financial Time and Bank of England Governor Mervyn King ( he wasn’t a Baron back then).

Indeed, to the extent that the environment in which we operate is more affected by the global output gap, and the global savings-investment balance, the speed with which monetary policy can achieve domestic goals inevitably becomes more dependent on others – on the success of authorities in other jurisdictions to also close their domestic output gaps; and on our collective ability to tackle the secular drivers of global saving and investment imbalances.

Is Mario singing along with Lilly Allen “It’s not me it’s you” and “It’s not fair”? Also you may note that he is agreeing with one of my themes which is that the credit crunch provided the coup de grace to “output gap” theories. He would not put it like that but you see it has now failed in countries ( UK for example) and now apparently we are told by default in the Euro area so now we have a world one! Please just think through the implications of that and let me offer just one. How would you possibly ever measure it?

Downbeat forecasts

As ever the more private thoughts meet a leaky vessel and let us hope that unlike in the past hedge funds were not given an “early wire” to this. But Bloomberg have picked up on some details.

Draghi sees cutting Euro GDP by as much as 0.5%, document shows

That is a little vague as there were mentions of three years and others used the word growth as we wait to see if that is total or annual. But there was more to come.

Draghi Warns Brexit Will Lead To “Competitive Devaluations”

I wonder if he managed to say that with a straight face! Also I note that the Brexit purdah did not last long. However there is more.

ECB’s Draghi: Concerned Brexit will lead to competitive devaluations, says its time to address bank vulnerabilities ( @DailyFXTeam )

The latter bit caught my eye as we have been told for the last 8 years or so that the ECB has been on the case of reforming the banks and time and time again we have been told that they are “resilient”, yet vulnerable is apparently the new resilient. Every ECB press conference Mario Draghi speaks about economic reform and each month it is the same groundhog day style statement. This if course comes back to the issue of how you can ever reform banks that know they will be bailed out?

The Italian banks

There is an obvious problem here as resilience morphs into vulnerabilities like the 360 billion Euros of sour loans at the Italian banks. This is a fast-moving situation where it appears that Italy has been informed that an outright bailout breaks the new Euro area banking rules. I am grateful to @liukzilla for pointing out that the vehicle below might be used.


This is 80% owned by the state and seems at first sight to be an effort similar to Portugal where you help the banks but try to keep it off the national debt numbers. For now we seem to be left with the bad bank Atlante which cannot have much more of its 4.25 billion Euros left.  The problem with other banks putting money into it is that they are weakened too and this is similar if not the same to the way that some of the cajas in Spain hit trouble.

Any large-scale move here seems set to blast a hole in the Euro area banking union rules and post questions for the whole concept of it.


So we see one of the reasons for the equity market rally or what is called “risk-on”. There is no explicit “whatever it takes” phrase but Mario Draghi is hinting at yet more asset purchases. So we have a type of Mario “Put Option” for the equity markets. The danger is that he ends up turning fully Japanese and we end up with a Frankfurt Whale competing with the Tokyo Whale. The play King Lear has the image of a little old lady turning the wheel of fortune well each turn of this particular wheel is one more nail in the coffin of the concept of price discovery as instead markets front-run central banks.

Meanwhile we have gone beyond a drum beat and a bass line to a full orchestra playing one of the longest running themes of my work.

Since Thursday, global stock of negative-yielding debt has jumped $1 trillion to just under $11trn, says BAML ( Chris_Whittall )

There is more.

Global 10y sovereign bond yields tumble to record low 0.5826% after Brexit, according to Citi. ( @ReutersJamie )

I still remember going to a UK “think-tank” around 5 years ago and warning about this and noting it hit home. But everybody apart from me then forgot about it.


Is Abenomics in Japan all about the stock market and the Yen?

Today has seen already some developments which will be regarded ruefully in Tokyo. Of course such things are an ever-growing list out there but one is a combination of an own goal and changes in the UK situation. The own goal is the way that the Japanese Yen has rallied since the Bank of Japan announcement that it would cut (some) interest-rates to -0.1%. The initial impact saw its effective or trade-weighted index drop just below 128 but now it is more like 135 according to the Bank of England. Ooops! Even worse if we switch to the UK where Brexit rumours have had the UK Pound £ imitating the Grand Old Duke of York this weekend ( he marched them up to the top of the hill and he marched them down again…) take a look at what has happened . The first quote is from the 29th of January for me.

If we switch to the UK then the Pound £ has gained 3 Yen from 170.3 to 173.3.

The one below is from Brenda Kelly on Twitter this morning.

*GBP/JPY DROPS 1.5% TO 159.682, LOWEST SINCE NOV. 2013

Down is indeed the new up!

If we recall that one of the arrows of Abenomics is a more competitive currency there is food for thought in those numbers. Indeed we can go wider whilst also being more local to Japan as I note The Japan Times picked this out for an opinion piece.

Ongoing uncertainty about renminbi devaluation is fueling fears that deflationary forces will sweep through emerging markets and deliver a body blow to developed economies,

I wonder what developed country in particular they were worried about?

Some truth about the stock market and Abenomics

I have made the case for some time that another supposed arrow for Abenomics has been a rising stock market. We can link this in my view directly to the fact that one of the objectives of what is called QQE in Japan – in case you are wondering QE bit the dust at around QE 14 in the way that Windscale became Sellafield in the UK – is a rising stock market to generate hoped for wealth effects. This morning the Japanese Finance Minister has apparently been rather explicit on the subject.

@DailyFXTeam Japan Finance Minister Aso: Stock prices are the clearest indicator of Abenomics

Indeed Aso san then went even further.

‏@DailyFXTeam Japan Finance Minister Aso: Stock prices are a leading indicator, Do not know if stock prices show reality.

I wonder what “reality” he is looking for! But if we take his view there are more than a few issues here. Let is start with stock prices being a leading indicator. From Bloomberg.

Since the BOJ’s Jan. 29 move, the benchmark Topix index has plunged more than 7 percent.

Those are numbers after last week’s strong rally so let us look further back for some perspective. Since this year began the Nikkei 225 has fallen 15.4% and it is some 10.6% lower than a year ago. Thus as we stand the leading indicator is negative and this is the clearest indicator of Abenomics according to the Finance Minister.


This was part of the Japanese economic revolution back in the day. But these days it has been buffeted by the swings in the value of the Yen and accordingly some of it has been exported to countries such as Thailand. This mornings sentiment and confidence update from the Markit Purchasing Manages Index was not particularly cheery.

Flash Japan Manufacturing PMI™ at 50.2 (52.3 in January). Flash headline PMI reading drops to eight-month low.

If we delve deeper into the report we are told this.

Latest data indicated only marginal growth in operating conditions at Japanese manufacturers………Data suggests that the fall in total new work intakes was caused primarily by a contraction in international demand, with new exports declining at the sharpest rate in three years.

This reminds of the problems Japan seems to be having with its trade position but before I get to that  note the “contraction in international demand” bit which reinforces the discussions we have had on here concerning at best a decline in world trade growth and at worst an actual contraction.

Trade problems

Even the BBC has spotted that there might be an issue here.

The country’s value of exports fell by 12.9% in January from a year earlier, supporting concerns that the slowdown in China – one of the country’s most important trading partners – is continuing to hurt demand. Imports, meanwhile, fell by 18%.

They seem to miss that the deficit is lower and of course we do not have to look much beyond the lower oil price for that. After all Japan is an enormous energy consumer and importer. But this poses its own question as with a much lower import bill via lower oil and commodity prices Japan should be seeing a large trade boost especially if we add in the past declines in the value of the Yen. Bloomberg gives us a little more perspective here.

The trade balance, which swung back to a surplus of 140.2 billion yen ($1.2 billion) in December, was in deficit for nine months in 2015. Exports declined 8 percent in value last month and imports fell 18 percent. The annual trade deficit was 2.8 trillion yen.

Note that the surplus in December also saw a lower export value. Let us move on whilst noting that the troubled development above will be good for the GDP statistics on a year on year basis for a while.

What about wages?

This has been an area where the official and mainstream media view has been that wages growth is perpetually about to turn a corner. More than a few have argued it already has sometimes above evidence which suggests nothing of the sort. Meanwhile I continue to point out a much more difficult reality. From Japan News earlier this month.

The nation’s workers barely got a pay rise in 2015, with a 0.1 percent increase in cash earnings slower than the 0.4 percent bump in 2014. Total wages haven’t risen more than 1 percent since 1997 and they fell for the past four years once inflation is accounted for, the Health, Labor and Welfare Ministry said Monday.

Past problems with wage rises being low were ameliorated by inflation being pretty much non-existent. However the push for higher inflation under Abenomics makes workers worse off in the manner that the rise in UK inflation in 2010/11 that the Bank of England looked away from did as it pushed real wages and crucially the economy downwards. What are the prospects for 2016? From Reuters.

Japan’s automaker labor unions are reducing their demands for pay rises for the next fiscal year from amounts sought the previous year…….The labor union of auto giant Toyota Motor Corp , which sets the tone for annual wage talks across Japan, is seeking a 3,000 yen ($26.31) increase in monthly base pay, half of what was sought last year.

I am afraid that we have to tear another page out of the economics textbook here as Japan tells us it is pretty much at full employment. The unemployment rate is a mere 3.5% and Japan Macro Advisers tells us this.

The job offers to applicant ratio rose to 1.27 in December, hovering at the highest level since December 1991.

However care is needed as whilst it is some time now since I worked out that back then Japanese stores had lift attendants and people were employed to count those crossing bridge so full employment may be not all it seems.


Many media outlets are expressing concerns about Abenomics which represents quite a change from the previous cheerleading. However this is not a time for triumphalism as you see Japan does have strengths such as its full employment (with the caveat above) and the way it treats its elderly. But this from Japan Macro Advisers nails the previous hype about reform.

In reality, no significant structural reforms were executed. An attempt to deregulate the labor market was quickly abandoned. The rigid and uncompetitive service sectors remained untouched. No attempt was made to reform the public pension system, but it was instead used as a way to prop up the stock market.

Of course the media (especially the Financial Times which is now Japanese owned) may fear this. From the Guardian.

Only last week, the internal affairs minister, Sanae Takaichi, sent a clear message to media organisations. Broadcasters that repeatedly failed to show “fairness” in their political coverage, despite official warnings, could be taken off the air, she told MPs.

Meanwhile we have discussed on here the problems of long-term contracts and pension companies in a negative interest-rate world so here is The Yomiuri Shinbun.

The Bank of Japan’s negative interest rate decision has started affecting the life insurance market, with sales of some products such as whole-life insurance policies being suspended following the announcement.

I shall leave you with Alphaville.

Big in Japan, oo the Eastern sea’s so blue
Big in Japan, alright
Pay, then I’ll sleep by your side
Things are easy when you’re big in Japan
When you’re big in Japan