The yen snapped its longest losing streak since 1971 on Wednesday, but a hodgepodge of developments served to underscore how we got here in the first place.
Japan’s trade deficit in March was 412.4 billion yen, more than five times wider than expected. The pace of export gains decelerated and imports rose more than anticipated, a function of both higher energy prices and the weaker currency.
It was the eighth consecutive monthly deficit (figure below). That’s the longest such streak since 2015.
Note that January’s shortfall, at 2.2 trillion yen, was the largest in eight years.
The rapidly weakening currency is both a cause and a consequence. The yen is at a 20-year low. That exaggerates the impact of soaring energy prices.
To be sure, the main culprit for USDJPY’s relentless ascent is rate differentials. According to Bloomberg’s Simon Flint, three quarters of the recent move in the currency can be explained by the widening yield gap, as Treasurys selloff and the BoJ anchors JGB yields.
It’s possible the recent move may have taken the pair beyond what’s justified by the fundamentals, though (figure above).
That brings us neatly (and quickly) to Kuroda’s latest efforts to defend the bank’s cap on 10-year yields, which tested the upper-limit Wednesday on the heels of Tuesday’s bond selloff stateside. Sure enough, the BoJ stepped in. The bank resumed intervention with unscheduled buying and later announced another round of consecutive daily fixed-rate bond-buying ops for Thursday, Friday, Monday and Tuesday.
Plainly, 130 on USDJPY is not a sufficient deterrent for Kuroda when it comes to defending the 0.25% line in the sand for yields. Consider what this means. The BoJ is still conjuring yen for unlimited bond-buying ops, even as the currency’s slide amplifies an unfavorable trade balance, which is itself an excuse for currency weakness. That, as the Fed persists in hawkish rhetoric and US yields continue to climb.
With JGB yields capped, the yield differential can only narrow from one end. Either US yields fall, or else the policy divergence widens, at least as manifested in bond yields. Note that JGBs are down just 2% in 2022 versus Treasurys’ epochal ~9% drawdown.
“The surprisingly rapid pace of yen weakness has raised concerns among Japanese officials, [but] the currency market continues to push the yen weaker, recognizing that verbal interventions alone were unable to reverse the currency’s trend in the past unless they came with a fundamental shift in the BoJ’s policy,” UBS said Wednesday. “To this end, even if the BoJ were to conduct an actual FX intervention at [the] 130 level, it is unlikely to put a hard cap on the currency pair’s rise unless the central bank followed up with concrete policy tightening measures, such as allowing a meaningful rise in JGB yields.”
I suppose I’d reiterate points from Tuesday. This is an extreme move in one of the world’s most important pairs, and that kind of thing doesn’t just — you know — happen. Or at least not without something else happening. As nebulous as that invariably sounds, it’s the best way to capture the generalized sense of angst one gets from pondering such a blatantly stretched move.
On that point, SocGen’s Kit Juckes noted that “the nine-week USDJPY RSI has only spent a dozen weeks in the 90s since 1984, most of them in 2013, when Abenomics arrived, and USDJPY rose from 85 to 105.” As he went on to write,
Maybe that, though, is the most instructive period, for two reasons. First, the weaker yen was a clear policy choice, as a tool to fight deflation, and the MOF/BOJ didn’t lose their nerve as it fell. Secondly, the 10-year Treasury/JGB yield differential widened by 220bps during the course of the year. So far this year, the yield differential has widened by just over 1%, and USDJPY has risen from 114 to 128. So, USDJPY has risen half as much this year (so far), in percentage terms, as it did in 2013, on the back of a rate move that was also half as big. On that basis, there’s nothing extraordinary about the market reaction.
Still, Juckes acknowledged that the optics may compel the government to step in with more forceful measures to stem the weakness. He also noted that eventually, stretched technicals will “demand” a correction.
Coming full circle to the trade point, Juckes wrote that although the weaker yen helps with competitiveness, that effect comes (pretty much by definition) after a lag.
“Before then, it will boost import prices and importers will struggle to pass those on,” he remarked, adding that if he were in charge, he’d “favor sticking with weak yen policies and going the distance,” but said the finance ministry “may blink,” which, considering how overdone the move is, could lead to a significant correction.
