It is time again for us to look east to Nihon the land of the rising sun and earlier today we heard something that is becoming awfully familiar.
Japan’s finance minister warned markets that authorities stood ready to take “appropriate and bold action” as the latest flare-up in the Iran war pushed the yen under ¥163 to the dollar for the first time in almost 40 years.
In a press conference on Wednesday, Satsuki Katayama said that Japan’s policy on potential intervention remained unchanged and that it would take action if necessary. (Financial Times)
So we have more open mouth operations to support the Japanese Yen and the use of the word “bold” is a threat of more foreign exchange intervention. This comes on the back of another recent effort to support the Japanese Yen.
attention in the foreign exchange market is focused on the actions of the Government Pension Investment Fund (GPIF), which manages Japan’s public pensions. Some estimates suggest that if this “giant whale,” with assets under management approaching 300 trillion yen, increases its purchases of yen-denominated assets, it would be equivalent to roughly three times the yen-buying interventions by the government and the Bank of Japan this spring. (Nikkei.com)
The Japanese government has been trying to put into people’s minds the large sums that the GPIF could deploy to support the Yen.
“If the allocation ratios for domestic bonds and stocks are raised to the upper limit, a theoretical yen buying and foreign currency selling of 33.8 trillion yen could occur,” says a market insider. This would be equivalent to 2.9 times the amount of the government and Bank of Japan’s foreign exchange intervention this spring. (Nikkei.com)
Remember the morning we in the UK woke up to see that the Japanese Yen had surged as high as 103 versus the US Dollar? That was back in the time that there were fears of a tsuami of money rushing into the Yen as Japanese investors withdrew their foreign investments. In a way we are in a zone of Andy Burnham style “vibes” as people believed it might happen then. But now they do not probably influenced by the Nikkei being around 66,000 and thus much more expensive. That is really rather awkward for it is The Tokyo Whale which has done so much to drive it there.
A basic problem is that Japanese investors or what is known as Mrs.Watanabe have done really well out of the Yen fall. Over the past year they have made 11.5% out of investments using the US Dollar before we even look at the investment itself.With the Yen falling to another low at 163.43 they may well simply decide that the trend is their friend.
Is this good or bad?
Let me highlight the competitive advantage via this from Global Markets Investor.
The Bank of Japan’s nominal effective exchange rate index has fallen to the lowest level on record. This tracks the Yen against a broad, trade-weighted basket of ~60 currencies, including the US Dollar, Chinese Yuan, euro, and British pound.
At this point Japan Inc will be thinking of the competitive advantage here albeit regretting the phase when it sent some manufacturing to Thailand and Vietnam. In terms of manufacturing Japan Inc will be particularly noting the nearly 18% fall against the Chinese Yuan. I am sure that the Chinese have spotted this too as after all the US Treasury has from time to time accused them of being currency devaluers whereas this move has been accompanied by.
But my words like silent raindrops fell
And echoed in the wells of silence. (Paul Simon)
Energy Prices
This area highlights the bad and it rolls straight into another feature of this morning.
BREAKING: Brent Crude surges above $98 after Yemen’s Houthis strike two Saudi oil tankers in the Red Sea. (Bull Theory)
The problem for Japan is several fold. It starts with it being a large energy importer and continues with it having to pay a higher US Dollar price with a depreciated Japanese Yen. Or if you prefer the inflation fires are being lit again. Plus there is trouble ahead in another area.
QatarEnergy is preparing to further extend force majeure on LNG shipments through mid-October, say people with knowledge of the matter. (Bloomberg)
Also as we look ahead there is likely to be more demand for LNG.
The Hormuz closure is choking LNG supplies to Europe European imports are down 33% year-over-year (on a 30-day moving avg basis). (Stephen Stapczynski)
Europe has been slow in refilling its reserves in what looks like another car crash for it. I did point out the issue of hoping for lower price later on social media when the plan started. But for today’s purpose that may put Japan under further price pressure looking ahead. So in short it is a bad time to be weakening your currency as the one-off gain is threatened by a flow of inflation a situation my home country the UK knows only too well
Interest-Rates
The problem here was inadvertently highlighted by Bloomberg yesterday.
Bank of Japan officials are open to raising interest rates at a faster pace than the consensus among economists, with the yen’s continued weakness adding to upside inflation risks, according to people familiar with the matter.
So more Japanese open mouth operations and there was more.
The officials are aware that many BOJ watchers expect the bank to move roughly once every six months, but they’re open to moving earlier than that timeframe if needed, with no preset course in mind, the people said.
If you look at the 11.5% decline over the past year an extra 0.25% interest-rate rise would rake 46 years to repay it. Plus the enthusiasm to raise is so often just around the corner on a Roman road.
The BOJ is widely expected to hold its policy settings steady at its July 31 board meeting, after raising the benchmark rate last month to 1%, the highest in 31 years.
This rolls straight into the theme I began in October 2023.
Bringing that up to date even a 0.25% interest-rate rise is rather expensive when you are charging it on 518,224,842,227,000 Yen of Japanese Government Bond holdings. Plus remember they intend to up the buying again next March.
It is on this road that the Bank of Japan lost control of bond yields as we have seen them soar. It is a case of “insane in the membrane” as a policy to protect the bond market has depth charged it. Even the Japanese owned Financial Times cannot avoid this reality.
A long-running sell-off in Japanese government bonds, owing to rising interest rates, huge fiscal stimulus and fears of inflation, has sent 10-year bond yields surging above 2.5 per cent for the first time this century. The 1.6 percentage point jump since the beginning of last year makes Japan the world’s worst-performing major bond market over that period. Yields rise as prices fall.
One way of looking at this is that Governor Kuroda got out at the right time.
Comment
Japan in a sense had a choice between protecting the Yen and protecting its bond market and has managed to lose both, This is really rather awkward when you are a control freak. From the point of view of Japanese workers and consumers it means inflation something that until recent times they had little experience of. Abenomics has turned into what they feared as Japan Inc gets a boost whilst The Lost Decade theme of lower real wages continues.
For the rest of the world Japan is exporting deflation.