Spare A Thought For The Bank Of Japan On Friday

Although the list of aggrieved parties following Donald Trump’s wild Twitter screed is long, one person who has a claim on a spot in the top five is Haruhiko Kuroda.

The Bank of Japan has a yen problem and it got materially worse on Friday following the US president’s social media tirade.

USDJPY fell more than 1% to close the week, as Trump’s shrill dollar lamentations were seen as raising the odds of outright, active FX intervention from Steve Mnuchin using the ESF (a move which would compel Jerome Powell to either match Treasury or else risk an outright confrontation with the White House).

That amounts to a disinflationary FX shock for Japan at a decidedly inopportune time.

Data out Thursday showed prices excluding fresh food rose just 0.6% in July YoY. While that matched estimates and surprised nobody, the fact that the market has all but stopped caring about the numbers speaks volumes. 2% is a pipe dream and everyone knows it.

Because the BoJ has no hope of ever hitting its inflation target, days like Friday when left-field trade escalations ignite a flight-to-safety bid are just insult to injury – salt in the wound, if you will.

The problem for the BoJ is a familiar one. Having all but exhausted its capacity to ease policy, it’s difficult for the bank to “match” the dovish pivot from the ECB, the Fed, the RBA, RBNZ, and a hodgepodge of EM central banks. The yen’s safe-haven status means the currency is prone to appreciating as the geopolitical landscape becomes increasingly fraught. Friday was a case in point.

The unwanted currency strength has weighed on Japanese equities. The Topix wiped out its gains for the year earlier this month, and analysts generally see no respite from yen appreciation in the near-term.

Worse for the BoJ is the fact that if they ever do finally admit that hitting the 2% inflation target simply isn’t possible, that would telegraph a possible unwind to some of the policies designed to achieve that unreachable goal, which would only spark further yen strength.

Shinzo Abe would presumably be reluctant to intervene to weaken the currency given the likelihood that such a move would rankle Trump amid tense trade negotiations that media reports suggest aren’t quite over the finish line. The Japanese PM is expected to meet with Trump at the G-7 to try and hash things out. The two leaders are close, and Abe flattered Trump during a farcical May visit complete with cheeseburgers and sumo wrestling.

Still, Abe’s desire to avoid a currency spat with Washington likely wouldn’t prevent Japan from intervening if USDJPY moved materially and sustainably lower from current levels. All’s fair in love and currency wars, after all.


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7 thoughts on “Spare A Thought For The Bank Of Japan On Friday

  1. Here’s a thought: Trump can “win” his trade war with China (to the extent that winning a trade war is possible) OR he can win reelection. But he can’t do both. If he’s willing to let the market drop 20%-25%, he may be able to call China’s bluff — but of course that would cost him reelection (and result in him spending much of the rest of his life answering subpoenas and testifying in various wood-paneled rooms). Or, he can put the trade war on pause, let Powell and the Fed take care of their business without daily interference, and huff and puff his way to another Electoral College victory in 2020. Sadly, his delusional belief that he can have his cake and eat it, too, is going to lead us all to ruin.

  2. What’s your view on BOE governor, Mark Carney, who in his lunchtime address at Jackson Hole laid out a proposal to replace the US Dollar with a “Libra-like” reserve currency in a dramatic revamp of the global monetary, financial and economic order?

  3. If the Japanese Government is buying debt from the Japanese Government, and the world still supports a strong Yen, and the Japanese Government wants a weaker Yen and more inflation…why doesn’t the Japanese Government just forgiving the debts of the Japanese Government?!

    1. Harvey, I don’t know if you’re being serious, but I hope you are, because that is 100% exactly what they should do and more than a few people have suggested just that. Of course, hard money advocates cringe at that idea and I think one of the reasons why is because they (the hard money folks) know that if Japan did that and nothing happened in terms of inflation, it would effectively mean that anyone arguing against MMT is definitively mistaken, and that Stephanie Kelton is the smartest person on the planet

      1. H- thoughts/suggestions on how best to start to wrap ones head around MMT? Def need the proponents, but would also like some opponents that can articulate a better detraction then the usual childish/banal “because it’s different than what I was thought to think, therefore it is wrong”.

        Much thanks for any suggestion.

  4. Inflation is so very easy to attain; just drop money from the sky and let the masses pick it up and spend…. Why don’t they just try that???

    1. What? And let the Plebs eat? Heck that might even lead to the Plebs to dancing and render them impervious to divisive politics (meaning less controllable)!

      But in all seriousness, the global wealth gap and the resultant lethargy in velocity of money is exactly why there is no inflation. Nearly all the liquidity from the CBs from the GFC went to non-consumption entities.

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