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Nightmare In Japan As Stocks Collapse Amid Yen Surge

It was a black day for equities in Asia and Japan was hit especially hard.

It was a black day for equities in Asia and Japan was hit especially hard.

By the time it was over, the Nikkei was lower by 4.5% and at one point, it was down the most since the U.S. election.

Nikkei

Needless to say, the surging yen didn’t help matters as the risk-off sentiment drove USDJPY beyond 105 for the first time in 16 months.

USDJPY

“Uncertainty over trade tensions between China and the U.S. hurt sentiment toward the dollar-yen as there is no clear technical support following the drop below 105,” Koji Fukaya, CEO at FPG Securities in Tokyo told Bloomberg on Friday.

The BoJ is in a particularly difficult spot here. The U.S. (whether Larry Kudlow admits it or not) has adopted a weak dollar policy by proxy and thanks to the fact that the addition of YCC to the policy mix has led to a steady taper of JGB purchases, Kuroda has a tough time convincing the market that any increase in JGB buying at regular ops is anything other than a temporary concession to calm markets.

BOJ

That’s why, as Goldman wrote earlier this month, the January 9 trimming of 10-25Y purchases was met with a sustainable dip in USDJPY while the subsequent attempt to effectively negate the hawkish impact of that at the next op was quickly faded.

BOJ2

This is going to become a big deal at some point because it effectively means the BoJ is trapped. They have no way to lean against yen appreciation. The only way out for Japan would be overt currency intervention (a non-starter given Trump, trade, and bowling balls) or else the BoJ buying foreign bonds which would be immediately seen for what it is (a rather thinly-veiled attempt to couch FX intervention in terms of monetary policy efficacy). Here are some notable (given the circumstances) highlights from Wakatabe’s cameo in parliament:

  • Bank of Japan Deputy Governor Masazumi Wakatabe says the BOJ law doesn’t allow the central bank to buy U.S. government bonds to influence foreign exchange rates.
  • Wakatabe responds to questions by a lawmaker in parliament
  • The finance ministry is responsible for currency policy
  • The BOJ shouldn’t hesitate to add stimulus if needed
  • The BOJ shouldn’t have any preconceptions and should consider all options for easing if needed
  • Synergy effects of fiscal and monetary policy are important
  • Free trade is very important for the global economy

The land scandal just makes that situation even more precarious as any bad political news for Abe is yen positive as it raises questions about the durability of the BoJ’s easing bias (and about the durability of Abenomics as a whole).

10Y JGB yields fell on Friday and are now at their lowest since November leading the JGB curve to bull flatten. As Bloomberg notes, “in addition to risk-off moves, fiscal year-end flows are in play with expectations for long-end buying [and] JPY money market rates are being driven by this with 1-week JGB repo dropping 20bps this week to the lowest levels since year-end 2017.”

JP10Y

“The market may need to consider possible further monetary easing from the BOJ should the dollar fall below 100 yen,” Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments Japan said on Friday, adding that “downward pressure on USD/JPY is increasing due to the political scandal surrounding Japan’s Prime Minister Abe, wariness over the trade war and some bearish economic indicators in the U.S., Europe and Japan.”

But again, there’s only so much they can do here because just about the last thing Abe needs is a situation where the BoJ does something that’s viewed by Washington as indicative of currency manipulation. And outright FX intervention would be a slap in the face to Trump.

The Topix plunged 3.6% on Friday, to its lowest since before the Japanese election:

Topix

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