Rebound in yen comes as relief to Japan’s policy makers, for now
The recent rebound in the value of the Japanese currency against the greenback will undoubtedly come as a relief to Japan’s economic policy makers as pressure on BOJ to respond to yen’s continued depreciation against the dollar has dissipated for now. Ironically, this could keep the central bank’s ultra-loose monetary policy unchanged yet again in its next meeting at the end of the month which could return the yen back to its depreciating trend.
Although the dollar’s pullback against all major units last week was stemmed largely from cooling US inflation data, it is interesting to note that the rebound in the Japanese currency began in the latter part of the previous week which left us somewhat suspicious of whether MOF has started to quietly intervene in the currency market to keep to keep the dollar/yen rate from breaching above the 145 level. If so, we should be able to detect this next month when Japan’s latest forex reserves are published.
What is also worth noting is that the ten-year JGB yield which has been below BOJ’s 50bps ceiling since the collapse of some US regional banks in March has been rebounding. We have long argued that given the inflationary backdrop in Japan, long-term rates seem notably misaligned and we continue to think that the BOJ will soon find itself defending its yield curve control (YCC) unless it is either tweaked or abandoned altogether.
Moving on to stock markets, clearly the rally in the US is broadening as expectations are rising that the Fed is coming close to a terminal rate, somewhere around 5.5%. Although US corporate earnings are bound to show a weakening trend, with growing likelihood of an economic soft landing, it may be that the market will ignore earnings results on hopes for a recovery next year.
In Japan, overseas investors are ploughing more money into our market with inflows continuing to rise on hopes for better corporate governance and improving shareholder returns. On the other hand, with overseas demand for goods remaining anaemic at best, we retain our recommended overweight position in domestic names, at the expense of large exporters and technology stocks which are strongly represented in the Nikkei 225 index.
Obviously much depends on whether BOJ policy makers will come to their senses to begin to normalise the bank’s very accommodative monetary stance to reflect growing inflationary risks that in our view do not warrant such low interest rates. If BOJ does nothing again this month, we will know for sure that its policies are not only not data dependent, but are heavily influenced by MOF which we think wants to keep government’s refinancing costs down as nearly a quarter of Japan’s annual budget is earmarked for refinance its rising debt levels.
