On Thursday, markets were “treated” to another “Econ 101” lesson.
While previewing this week’s slate of global data, I noted that trade figures for Japan would likely be worth a mention, even if the numbers weren’t likely to land above the proverbial fold.
The yen’s inexorable slide (the currency is on track for its worst year ever) has contributed to a terms of trade shock, which risks becoming self-fulfilling. Data out Thursday showed the country’s trade deficit reached a record last month at 2.82 trillion yen (figure below).
It was the 13th straight monthly shortfall, the longest such streak since 2015.
Japan’s import bill is spiraling due in no small part to the juxtaposition between soaring commodity costs and the ever weaker currency. Imports jumped almost 50% last month from the prior year, with energy driving the gain. Exports, meanwhile, rose at just half that pace.
At this point, it’s probably fair to assess that the benefit to exporters from the falling yen is outweighed by the drag on households. I’ve said this time and again: Japan isn’t used to inflation. Any inflation. And this is the “wrong” sort of inflation.
Although I’m no expert on Japan’s trade dynamics, one has to imagine the situation won’t improve this month barring a turnaround for the currency, which suffered another body blow earlier this week (figure below) when a red-hot read on core consumer prices in the US stoked bets on additional Fed hikes, driving dollar strength.
The selloff on Tuesday negated a fledgling rally sparked late last week by Haruhiko Kuroda who, after meeting with Prime Minister Fumio Kishida for the first since June, called recent moves in the yen “sudden” and “undesirable.”
On Wednesday, the BoJ tapped the brakes on markets, inquiring about an indicative price for intervention. The “rate check” triggered a rally, but in a testament to the absurdity of this situation, the BoJ also ramped up bond-buying in defense of the cap on 10-year JGB yields. So, the BoJ is conjuring yen to ease while implicitly threatening (on behalf of the finance ministry) intervention to strengthen the currency. During the same day.
Thursday’s trade report for August said the average exchange rate last month was 135.08 versus the dollar. That was 23% weaker compared to the same period last year, but, again, the currency has weakened considerably since last month.
Officials may be keen to defend USDJPY levels above 147, given the association with a 1998 intervention conducted alongside the US. Many traders appear to believe a sharp yen rally is just a matter of time, whether catalyzed by intervention, a BoJ policy tweak or both.
“The report that the BoJ was checking spot levels in USDJPY at 144.90 yesterday could be a precursor to intervention but is no guarantee,” SocGen said Thursday. “Officials from the BoJ, the MoF and the cabinet surely hope that raising the alarm will be enough to deter investors from taking another go at 145 [but] the litmus test may come next week if the Fed surprises with a draconian rate increase of 100bps,” they added, noting that Fed-BoJ policy divergence, yield-curve control and Japan’s deteriorating trade balance “are the main causes of the yen’s 25% collapse since March.”
“There’s a high risk of more verbal intervention or rate checking,” Bloomberg’s Mark Cranfield wrote. “That doesn’t mean the yen is safe from further weakness in this cycle, but the failure to breach 145 this week will act as a near-term reversal signal,” he added, noting that direct market intervention “could produce a rally of ~4% for the yen.”
I’d suggest (again) that absent help from Kuroda (where that means, at the least, widening the yield-curve control band), intervention will fail, especially in the context of a determined Fed and escalating bets on a higher terminal rate in the US.
“Trade surpluses were the norm back then,” SocGen went on to say, of past interventions. “The yen no longer possesses the safe haven appeal of the late 1990s,” the bank remarked. “We see two conditions necessary for a sustainable reversal in the JPY: The BoJ abandons curve control and a recession unfolds in the US, caus[ing] Treasury yields to crumble.”