(Bloomberg) — Japan is enjoying some success in its battle with speculators targeting the enfeebled yen and the central bank’s stubborn grip on yields, but more tests lie ahead.
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After months of jawboning turned into concrete action in the foreign-exchange market, speculative positioning has been pegged back at least in the currency space. Together with a favorable reduction in demand for the greenback, that has kept the yen well away from the key 150 per dollar mark in recent weeks, though US inflation data Thursday is an imminent threat.
“Japan’s authorities aren’t likely letting their guard down, but it’s looking increasingly likely that they’ve persevered and pulled themselves out of the woods,” said Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo. “They’ve also gotten lucky with the external environment, which seems to be changing.”
Unannounced currency intervention, ramped-up bond buying and an extra budget have helped Japan show financial markets that it is standing its ground on stimulus, even as the rest of the world tightens policy. But investors are well aware it stands alone, especially in the currency market, where peers like the US have refused to explicitly endorse its intervention policy.
Prime Minister Fumio Kishida and Bank of Japan Governor Haruhiko Kuroda reinforced their show of a vigilant and united front Thursday afternoon with an unscheduled meeting, just hours before the US data release.
“The recent one-sided and rapid weakening of the yen is undesirable for the economy,” Kuroda told reporters. Both he and Kishida agreed on the need to keep pushing for sustainable growth in prices, wages and the economy, the governor added.
Kuroda Meets Kishida as Japan Shows Vigilance Ahead of US CPI
Market reaction to the US consumer price figures will provide further evidence that Japan has played its cards relatively well or reveal that the recent calm was merely a prelude to a fresh storm. A stronger-than-expected result could drive yen weakness, leading traders to price in even more US rate hikes, while a softer reading may have the opposite effect.
“If CPI continues to be very strong, the dollar may rise again but it’s hard to see US economy enduring rate hikes up to 5.25%,” said Kato. “The probability is rising that the recent dollar-yen high of 151.95 may be seen in retrospect as the peak.”
Steadier Yen
The yen has held on to a large chunk of its gains following Japan’s record $43 billion spend last month when the currency looked like breaching 152. Since then, it has weathered both another dovish decision by the Bank of Japan and a further outsized rate hike by the Federal Reserve, events speculators had previously jumped on as an excuse to sell the currency.
It traded around the 146.20 level Thursday.
“If you ask me whether Japan has had some success with its forex interventions, I’d say yes,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute. “The interventions on Oct. 21 and 24 went well in that the authorities moved early because they knew the impact would be weaker if they waited until the Fed meeting.”
By staying silent on whether they have entered markets since their first intervention in September, Japanese authorities have kept traders partly in the dark over their plans. Apparent action has also generally taken place outside Tokyo hours to show foreign traders they do not have a free rein to attack.
Calculated Move
A combination of large interventions and possible stealth moves is resulting in a cheaper bill than many economists expected. The use of foreign securities to fund yen buying instead of cash deposits also looks like a calculated move to show the firepower Tokyo has immediately at hand is far larger than its simple stash of greenbacks.
Japan Likely Sold Treasuries to Show FX Firepower, Analysts Say
“Japan is trying to send a strong message that it has ample resources to intervene,” said Yuji Yamazaki, currency strategist at SMBC Nikko Securities. Yamazaki, along with some other economists, believes Japan has been selling Treasuries despite earlier skepticism that such action might raise Washington’s ire and result in a self-defeating rise in US yields that renews pressure on the yen.
Market data also point to some success. A gauge of option market bets on outsized moves in the currency over the short-term — so-called one-month butterflies — has fallen for thirteen straight days to the lowest since August.
Paradoxically, bets by some investors that the market can pressure the BOJ to break ranks has also likely helped bolster the yen. Despite the central bank’s insistence it will stick with its 0.25% cap on 10-year debt, swaps markets still point to a tweak, possibly around the time Governor Haruhiko Kuroda steps down in April.
Even a small signal from the central bank that it’s contemplating dialing back its easy policy is likely to lead to a yen rally, according to market participants. For its part, the BOJ will point to a falloff in the amount it is spending to defend the yield cap — fixed-rate bond purchases hit a record during the speculative attacks on the market in June.
For now, it looks like Japanese policymakers have bought enough time without having to buckle to market pressure. A change in the Fed policy path has long been seen as the key moment that will turn the tide for the yen, and Jerome Powell’s signaling of smaller rate hikes earlier this month may have provided that moment.
Still, Powell also flagged that US rates would end up higher than markets think, a classic central banker’s ploy of offering something for both sides of the argument.
“That means it will take time to reach the final phase of rate hikes,” said Osamu Takashima, chief FX strategist at Citigroup Global Markets Japan. “And that means the period of uncertainty will be prolonged.”
–With assistance from Toru Fujioka and David Finnerty.
(Adds details of Kishida and Kuroda meeting.)
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