MOF opens another front in Japan’s losing battle against capital markets

The events in capital markets played out as we had expected and explained in our last week’s publication. Number of central banks followed Fed’s move to aggressively raise interest rates to fight off inflation at the expense of economic growth. This led stock markets to tumble towards their June lows as bulls look to be capitulating while scope for economic policy errors have risen again, particularly in the US and UK. Moreover, with Putin ordering a partial mobilisation of Russia’s reservist army to fight in Ukraine, the war in eastern Europe is looking to become increasingly uglier and more consequential.
As we also suspected, BOJ stubbornly stayed its course of keeping its monetary policy very accommodative. Japan’s central bank governor, Kuroda-san went as far as forecasting no likely change in BOJ’s stance for the next two years which given the global inflationary backdrop and fast diverging interest rates between Japan and the rest of the developed world which has battered its currency, it was truly shocking to hear.
Unsurprisingly, this led to a sudden plunge in the value of the Japanese unit with the dollar/yen rate surging above 145 which as we had noted looked to have been earmarked by MOF officials in the prior week as a level they will likely defend by intervening in the currency market. Sure enough, the intervention came with the yen recouping all of last week’s losses in seconds, with the rate briefly falling back towards 140 level before seeing yen sellers re-emerge.
It is important to underline that MOF’s intervention has officially opened another front in Japan’s battle against market forces as BOJ was also busy suppressing rates by buying more longer dated JGBs to fight off rising yields. It should also be noted that with Japan’s $1.2trn of currency reserves, the amount represents only a few days of trading volume in its forex market to expect any meaningful trend reversal in the value of the yen. 

Given that Kuroda has left himself no room to pivot, any policy shift will have to either wait for his tenure to end next April or he simply has to resign. With dollar gaining further ground against all major units and inflation in Japan likely to rise further as BOJ itself is now predicting, we simply cannot see how these contradicting market interventions can be sustained for another 6 months before a new governor is appointed. In other words, we think Kuroda has to go!