Unless you’ve been too busy getting over the latest Walking Dead cliffhanger, then you should know that the yen has been gaining tons of pips against its counterparts this week. More importantly, it doesn’t seem like the Bank of Japan (BOJ) is in any hurry to do anything about it.
Since the start of the year USD/JPY, the most closely-watched yen pair, has fallen by a bit more than 10% with a third of that move happening in the past week alone. The rate of the yen’s strength is bad news for Japan’s exporters since it makes Japan’s products significantly more expensive in the global markets.
With Japan’s latest growth numbers already inspiring whispers of a technical recession, the pressure is stronger for the BOJ to avoid a deflationary mindset.
This is where consumers and businesses expect inflation to remain subdued, which then prevents businesses from investing and raising wages and consumers from spending their moolah. Right now they need yen strength as much as they need bullets to their heads.
So why isn’t the BOJ pushing the pedal to the metal by intervening in the forex markets? Here are four possible reasons:
1. The G7 summit is coming up
Next month Japan is set to host the G7 meeting where it’s widely expected that the leaders will have discussions against governments actively manipulating their currencies. In fact, just this week Prime Minister Shinzo Abe called for stable exchange rates, saying that counties should avoid seeking to weaken their currencies with “arbitrary intervention.” Awk-waaaaard.
2. Currency interventions don’t really work against JPY strength
At least not if the BOJ is flying solo. If we discount the unconfirmed currency intervention rumors in mid-March and mid-February, then the last time the central bank had directly bought USD/JPY was in October 2011 when price dropped to levels not seen since the end of World War II.
Price eventually went back to near its pre-intervention levels and it took another catalyst to finally push the pair higher. The only time a currency intervention had any lasting effect was in March 2011 when other countries joined hands to help Japan after an 8.9 magnitude earthquake hit the country.
3. The BOJ’s arsenal is running out
Market players and business owners already have their doubts on the BOJ’s QQE program and negative interest rate policy and their effectiveness in achieving the central bank’s goals.
This makes it even more difficult to justify stretching their budget to include a currency intervention (see reason #2). Right now it might be better if Kuroda and his gang put their thinking caps on and settle on a more effective way to combat the yen’s strength.
4. The officials are doing all they can at the moment
With their hands (and funds) tied, government officials are using one of the few things left at their disposal: jawboning.
Over the past 48 hours we’ve heard from chief cabinet secretary Suga, who said that the excessive forex moves have a bad impact on the economy. Tomomi Inada, policy chief of the ruling Liberal Democratic Party (LDP), also grabbed the mike and said that the yen’s current rate is not reflecting Japan’s fundamentals. Even Economy Minister Nobuteru Ishihara said that they’re watching the moves by speculative players, as they believe that the yen’s recent moves are mostly speculative.
Last but definitely not least, Finance Minister Taro Aso (the guy who would give the thumbs-up to the BOJ before a currency intervention) warned that that the yen’s rapid moves are undesirable, and that they’re watching with “a sense of urgency” and are ready to “take necessary steps under circumstances.” Duhn duhn duhn.
Forex analysts and traders speculate that it won’t be until USD/JPY reaches 110.00 before we see any concrete action from the Japanese officials. Others say that the pair could fall as far back as 105.00, while some believe that the BOJ will let the recent move play out before considering any action. In any case, it will likely be a while before the BOJ could justify another currency intervention on USD/JPY.
How about you? Do you think the BOJ should do something about the yen’s current gains? If so, what are the options that the central bank should consider?