The Bank of Japan is now effectively at war with the Japanese finance ministry, an absurd outcome months in the making.
Masato Kanda, Japan’s top currency official, confirmed the first intervention since 1998 on Thursday, the same day Haruhiko Kuroda stuck assiduously to the script while reiterating the central bank’s intention to remain steadfast in monetary accommodation for the foreseeable future.
“We won’t raise rates for some time,” Kuroda said, adding that the bank debated the proper course of policy “thoroughly,” and “concluded that we will continue with monetary easing.”
I suppose this is obvious, but BoJ policy won’t likely be changing under Kuroda, for whom easing in the service of engineering sustainable 2% inflation is tantamount to a religious imperative. On Thursday, he said the bank’s forward guidance could be in place until 2025. “You can expect no change to our forward guidance for about two to three years,” he said, at today’s press conference.
It’s possible, I’ve suggested, that Kuroda is now prioritizing his own legacy over the national interest. Inflation in Japan is nearly a full percentage point above target, and Kuroda’s defense of the cap on 10-year Japanese government bond yields is the driving force behind the yen’s worst year on record (figure below).
The currency’s inexorable slide is contributing to a terms of trade shock as commodity prices remain elevated. Japan notched its largest trade deficit on record in August, the 13th consecutive monthly shortfall.
Kuroda’s obstinance came hours after the Fed delivered a third consecutive 75bps rate hike, hours before the Bank of England was poised to hike rates for a seventh consecutive meeting and around the same time the Swiss National Bank exited negative rates, leaving the BoJ alone in monetary Neverland.
There’s “no need for Japan to remove negative rates because others have done so,” Kuroda insisted. He cited “clear differences in the price situation.” His remarks pushed the yen towards 146.
Kanda’s intervention drove a sharp rally (figure below), but the MoF is fighting a losing battle. Both the fundamentals and monetary policy argue for more yen weakness, particularly with the Fed now telegraphing a more aggressive near-term rate path.
“We took decisive action just now,” Kanda declared, less than an hour after Kuroda finished speaking. “The government is concerned about excessive moves in the FX markets,” he said, blaming “speculative” behavior for “sudden and one-sided” price action.
Again, the problem isn’t “speculators.” If speculators feel emboldened, it’s because Kuroda is encouraging them, but at this point, at least some “speculators” are betting the government will eventually call time on the BoJ. JGB shorts and wagers on a yen rally may seem a fool’s errand now, but the moment the BoJ relents (if they ever relent), the snap higher in yields and the knee-jerk rally in the currency will be something to behold.
For now, though, the MoF may well find that its “decisive” interventions come to nothing. Kuroda is unmoved and unbowed.
“With the Fed turning ever more hawkish and the BoJ still printing money, it looks like the Japanese government wanted to stop a quick run to 150,” ING’s Chris Turner wrote. “Japanese authorities could well be doing battle with the FX market for the next 6-9 months as the dollar stays strong.”