The Japanese Yen falls as the Bank of Japan promises to buy an “unlimited” number of bonds

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by Shaun Richards

As the week fires up the economic news has come from Nihon or Japan as The Tokyo Whale has started the week in hungry mode.

Announcement on the Conduct of
Fixed-Rate Purchase Operations for Consecutive Days
The Bank of Japan will conduct fixed-rate purchase operations for consecutive days
as follows….

So it is back in the game but we need to look further down the official notice and the emphasis is mine.

With regard to the outright purchases of JGBs (competitive auction method) during the period indicated above, the Bank may change the schedule and amounts of the
purchases as needed, taking account of market conditions.

It is offering to buy an unlimited amount of Japanese Government Bonds tomorrow, Wednesday and Thursday. That comes after doing this earlier.

TOKYO, March 28 (Reuters) – The Bank of Japan desperately defended its yield target on Monday by making two offers in a single day to buy an unlimited amount of government bonds, as it struggled to swim against the global tide toward higher interest rates.

There is an interesting choice of language from Reuters there. Anyone we tick one box as I was sure the Bank of Japan had not changed its spots when the media was assuring us it was getting out of the QE game.

Yield Curve Control

What is happening here is a response to international events and in particular the rise on bond yields we have been noting. Whilst the rise in US yields is the headline maker I thin that the rise in the benchmark German yield is more significant. Germany is fiscally prudent which is quite a contrast to Japan and has a central bank still doing QE bond buying but its benchmark yield is 0.62%. By contrast the Bank of Japan is trying to do this.

The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

That is at least 1% too low I would say. The only thing in Japan’s favour is the low level of inflation and as I will discuss later that is changing. Anyway if bond markets were tracking inflation they would be nowhere near where they are.

Even the Bank of Japan realises it cannot keep bond yields at 0% all the time so it has a range which used to be 0.1% and is now 0.25% which is where we are right now. At this point there are three main consequences for the bond market.

  1. The Japanese government is able to borrow very cheaply and we are on the margins of the text book case of its debt being monetised.
  2. Anyone who holds Japanese Government Bonds is being giving a handout by the Bank of Japan as the price is higher than otherwise.
  3. Volumes will be low ( the first offer today did not trade at all) until something moves things.
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The Yen Falls

Let me take you to the view of Nikkei Asia from last week.

The yen weakened to more than 121 against the dollar on Tuesday, a level not seen since February 2016.

It went on to note this.

“I think we could see an exchange rate of 125 yen to the dollar by the end of the year,” said one forex dealer who further shorted the yen. The Japanese currency last hit this range in August 2015.

Things have really rather sped up because today the Yen has fallen by two big figures and is  124.40 as I type this. So by the end of the year may be next week! There is an additional significance to the move as we consider the international position of the Yen.

The Japanese Yen (world’s third most-traded & third-largest reserve currency) is on track for one of its worst months ever. ( @DavidInglesTV )

There is an irony as we have gone from the Bank of Japan creating zero volumes in the bond market whilst putting volumes in the FX market through the roof! The central planners will be looking to deflect away from that one especially as when it was explicit policy they failed! Somewhere the former Prime Minister Shinzo Abe must be looking at this and wondering why all that monetary easing of Abenomics did not happen for him? Or to be more specific after weakening the Yen rebounded as those who remember the night it shot up to 103 will recall.

There are problems here as a weak Yen is not what it used to be as Nikkei Asia points out.

For starters, more Japanese cars and other products are made in the markets where they are sold. This undercuts the export boost from a weak yen

Added to this Japan is a very large energy importer made worse by the Fukushima issue which meant that many nuclear power plants were mothballed.

Today, crude hovers above $100 a barrel after Russia’s invasion of Ukraine. A weak yen drives up the cost of imported energy even more. These factors add to the negative side of the current yen depreciation.

With Brent Crude Oil at US $113 the oil price situation has deteriiorated too.

Inflation

Japan is about to see some at least by its standards. From Friday

The Services Producer Price Index (All items) rose 1.1 percent from the previous year. The Services Producer Price Index (All items ) rose 0.9 percent from the previous year.

Not much you may think but services inflation has been much lower than goods inflation and earlier this month we saw this in that arena.

The Producer Price Index rose 0.8 percent from the previous month

That made the annual rate 9.3% and import costs were rising even faster.

The Import Price Index (contract currency basis) rose 1.7 percent from the previous month.

The annual rate was 25.7% and it has been that or higher for a bit now.

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Even Japan cannot avoid the consequences of this. A factor holding inflation down will soon wash out of the numbers.

 The services sector even has reported the strongest deflation since 1970 (-2,8%), mainly due to the sharp
drop in mobile phone charges, down more than 50% since March 2021. ( BNP Paribas )

The impact has been to reduce things by a bit more than 1%.

Comment

One of my themes is that the central planning of the central bankers has consequences and side-effects and these are in play in Japan today. There were many fans of Yield Curve Control on the basis that it looked like what economics text books call a free lunch. The problem is that if you create a false market it creates problems elsewhere in the system which is why they are illegal ( well for everyone except the establishment itself).

The example here is of controlling the bond market and finding that the currency is taking the strain. It would be embarrassing to say the least if they had to intervene in the currency as a result of their intervention in the bond market.

USD/JPY reaching 125, what’s the Kuroda line? 125/126??? ( @Trinhnomics )

For now we have an inflation and a trade situation made worse by all of this. Previously Japan at least had a strong Yen to buy its energy imports with. Then we move onto the next stage of the story because a past theme of it being a Safe Haven is now singing along with Queen and David Bowie.

It’s the terror of knowing what the world is about
Watching some good friends screaming
“Let me out!”
Pray tomorrow gets me higher
Pressure on people, people on streets

Oh and across the world some at the Frankfurt Tower of the ECB will be getting a little nervous.

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