Heisenberg Report

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.