There has been one clear notable feature of the financial world this week and it has been this.
The Japanese currency weakened to 162.83 against the dollar on Tuesday, its lowest level in 40 years, according to LSEG data. The drop has revived speculation that authorities could reenter the market after spending a record 11.7 trillion yen ($73.5 billion) in April and May buying their own currency. (CNBC)
This brings several economic themes into play of which the simplest is that Japan has managed a competitive devaluation which will boost its exporters. That is one of the reasons that we have seen the Nikkei 225 index rise above 70,000. At this point we have Abenomics in play as whilst sadly former Prime Minister Abe san is no longer with us his economic policies are. Regular readers will recall we did expect a sort of Abenomics 2.0 under Prime Minister Takaichi and here it is.
Only yesterday I looked at how the Japanese Yen had devalued versus the Euro. Let me today bring it closer to home. Because at just under 24 Yen to the Yuan or Renminbi Japan has managed at nearly 20% devaluation over the past year. I have looked in the past at the Pacific currency wars and as Japan is winning I think we see a clear driver of the developments below.
TOKYO—China hit dozens more Japanese companies and several research institutes with trade restrictions, marking another escalation in Beijing’s campaign of economic coercion against Tokyo.
The new measures, announced by China’s Commerce Ministry on Monday, show Beijing isn’t backing down in a dispute that has rumbled on for months. China said the measures announced Monday were aimed at preventing Chinese-made goods from being used to enhance Japan’s military strength. ( Wall Street Journal)
Three years ago on June 30th 2023 I described the situation like this.
We see that the countries with the most mercantilist trade policies are also running a plan for a lower currency. In one case it is a depreciation and the other more of a devaluation but the end game is the same.
As of today Japan has been winning that game and has made a competitive devaluation. As it has not been called a devaluer by the United States there is something else here that will irk the Chinese because they have been in the past.
The Carry Trade
On that same day just over 3 years ago I looked at this.
One big reason I am gung-ho about financial assets is due to the huge ‘Carry trade’ that is playing out in Japan.
1. The Japanese Yen is weak.
2. Interest rates in Japan are negative.
3. You are getting high-interest rates elsewhere.
4. Investors may also find certain equity markets interesting based on earnings yield.
So, borrow in Japanese Yen and invest in financial assets in other countries. ( @AmarAmbami)
Looked at like that it is still in play. There have been what David Bowie would call ch-ch-changes as point 2 is no longer true. But the official rate is a mere 1% which remains a lot lower than elsewhere Switzerland excepted. So you are relying more on a weak Yen than the interest-rate and so far as it was 145 back then you have been winning.Or you could buy a two year bond to cover interest-rate risks at 1.4% and should the Ten continue to fall s it has been then you will be quite happy.
Investors will be less willing to do this based on currency expectations than negative interest-rates but claims the Carry Trade is over need some revision.
Interest-Rates
Bank of Japan Board Member Tamura san spoke about this on the 25th of June.
I believe it is important that, as early as now, the Bank move closer to a neutral monetary policy stance — that is, setting the policy interest rate closer to the neutral interest rate — to avoid a situation where upside risks to prices materialize and the Bank is compelled to raise the policy interest rate rapidly and significantly into a restrictive range beyond the neutral interest rate, and to ensure the policy interest rate is adjusted as smoothly as possible.
As you can see if he was a fast bowler in cricket he would be coming in off his long run-up and he was heading to deliver this.
Anecdotal information from firms,
which I place particular emphasis on, also suggests that the policy interest rate is still far away
from the neutral interest rate……..suggesting that the neutral interest rate is most likely around 2 percent.
If we just stick to the concept of the neutral interest-rate then he is arguing it is lower in Japan than elsewhere. Other central bankers have gone quiet in the issue but in general they used to argue it was in the range 2.5% to 3%. As to the interest-rate itself as I have been pointing out for several years the Bank of Japan has been like the boy who cried wolf or as Elvis Presley put it.
A little less conversation, a little more action pleaseAll this aggravation ain’t satisfactioning meA little more bite and a little less bark (ah-ah)A little less fight and a little more spark (ah-ah)
They have crawled to an interest-rate of 1% driven at least partly by fears over their own balance sheet and losses on their large government bond holdings. For newer readers I explained this back on October 2nd 2023.
That is why the Bank of Japan has hinted at an increase in QE bond purchases from March next year. As Scotty used to say in the original Star Trek “the engines cannae take it Captain”
Also as I pointed on on the 22nd of June Prime Minister Takaichi is in the process of appointing new Bank of Japan Board Members who will not vote for interest-rate rises.
Yentervention
There is lots of speculation about this and today there has been an official response.
Foreign exchange intervention by Japan to support the yen two months ago was successful, and some US authorities voiced support, the nation’s top currency official said, as the yen hovers at a four-decade low. (Bloomberg)
He carried on in that vein.
“Judging from how the market moved afterward, I think it clearly had meaning,” Atsushi Mimura, Japan’s vice finance minister for international affairs, said of the action during an interview with Bloomberg Wednesday.
You may note something familiar which is that official moves which lose money as QE bond buying did and presently the recent foreign exchange intervention are just swept under the carpet. You can bet we would be told if they made a profit…
Also one of the signals that intervention was coming was not present.
In the interview, Mimura refrained from spelling out some of the Finance Ministry’s standard currency policies, including a readiness to take bold forex action — meaning intervention — at any time. (Bloomberg)
Comment
Let me point out that whilst Japan Inc may be happy with this situation the Japanese worker and consumer will not be as they face this.
creating the risk of faster inflation in a country that imports the bulk of its energy and more than half its food.
As to what happens next I got an interesting reply on social media last night.
Shaun, I have been saying for a while BoJ/MoF/ Fed are not concerned USDJPY rise.
1) Japanese exporters are winning again
2) They do not want an abrupt stop to carry trade
3) Under Warsh/Bessent/Trump happy for higher USD/Stocks over 250th anniversary year
4) Yen v Yuan is key
( @RockySarni8180 )
On that road we can expect a weaker Yen and more frustration for China.