More Yen Sanity

There’s one dove left in a world of monetary policy hawks.

The Bank of Japan “will keep up powerful easing with yield-curve control as a pillar,” Haruhiko Kuroda said Tuesday. Price dynamics in Japan, he remarked, “differ a lot” from those in the US and Europe, and the BoJ “must” persist with accommodation to support the domestic economy.

Kuroda’s commitment piled still more pressure on the yen, which hit another 20-year low this week, renewing concerns about disorderly depreciation following a relentless slide that grabbed headlines in April. The BoJ’s YCC program means the spread between 10-year US Treasury yields and yields on 10-year JGBs is destined to widen on days when Treasurys sell off and JGB yields are at or near the BoJ’s cap.

The yield gap is back to ~280bps (figure above) and USDJPY back through 130 on its way to 135, according to some analysts.

Bearish yen sentiment is pervasive. It’s in markets (e.g., riskies) and it’s also in anecdotes. “Sell-yen orders are coming in around the clock,” one FX veteran told Bloomberg. Apparently, a two-decade high in USDJPY (figure below) is no impediment for traders as long as Kuroda sticks to the script.

This creates a profoundly silly, albeit painfully familiar, quandary for the government. The Finance Ministry rolled out the usual talking points this week. Currency movements should “reflect economic fundamentals,” and if they don’t, somebody might have to do something, where “something” means intervene.

Finance Minister Shunichi Suzuki said officials are “watching” FX markets “with a sense of urgency.” But intervening to stop the yen from depreciating when the proximate cause of that depreciation is the central bank governor comes across as farcical — slapstick, even.

There’s scant evidence to suggest Prime Minister Fumio Kishida plans to push for any kind of material change in the conduct of monetary policy. And it was just a few days ago when the Finance Ministry released a draft fiscal plan reiterating the primacy of the 2% inflation target and the necessity of meeting it “sustainably and stably.” That language could mean a lot of things, but one thing it surely doesn’t mean is tighter policy in the near-term. “It means the next BoJ governor must stay on Kuroda’s path,” Shouji Nishida said.

“We’re aiming for a virtuous cycle in which prices rise moderately while corporate profits, employment and wages improve,” Kuroda told lawmakers this week.

It’s a nice idea, but real wage growth has been choppy. After rising 0.5% or more on a YoY basis in January and March, inflation-adjusted wages fell 1.2% in April.

In a Monday speech, Kuroda suggested consumers are willing to accept higher prices which, in the Japanese context, would be a good thing. “The level of tolerance toward price rises is increasing among Japanese households,” he said, referring to a poll conducted by University of Tokyo professor Tsutomu Watanabe, who found that fewer Japanese shoppers would switch stores due to a 10% price hike in April compared to August.

In a testament to the power of Japan’s deeply entrenched deflationary mindset, consumers didn’t agree with Kuroda’s choice of words. At all. They made as much clear on social media. On Tuesday, he apologized. “I didn’t necessarily say it in an appropriate way,” he told parliament.

Of course, a weaker currency can be a good thing if it bolsters exports and tourism, or if it actually does contribute to the kind of moderate inflation that drives economies forward. With the yen tumbling, media outlets are increasingly prone to presenting the tradeoff in laughably alarmist language. “Get it right and policymakers can help kickstart a much-needed engine of growth in Asia,” Bloomberg’s Cormac Mullen and Keiko Ujikane wrote Tuesday. “Get it wrong and they risk a disorderly collapse in a major currency which would send the BoJ scrambling to adjust policy on the fly and Japan hurtling toward another recession.”

Hyperbole aside, the stakes are indeed high. And so are producer prices, by the way. The figure (below) is indicative of the challenges companies face in raising prices to consumers who aren’t used to inflation.

Note that the sharp move higher in consumer prices in April was attributable in part to a distortion created by phone fees.

Technically, April’s 2.1% print marked the achievement of the BoJ’s target. It was the hottest read on core inflation in Japan since 2008.

But between the phone factor and the cost-push nature of the increase, there’s no chance of a meaningful policy shift. “In this situation, monetary tightening is not at all a suitable measure,” Kuroda told lawmakers, referencing ongoing challenges facing the world’s third largest economy.

Last week, a member of Japan’s main opposition party asked Kuroda if he was personally experiencing any discomfort from rising prices. “It’s generally my wife who shops at supermarkets,” he responded.