- The path towards a lower yen is once again clear with the recent mollification of international criticism of Japan’s “beggar thy neighbor” policies among G7 finance ministry and central bank officials.
- While the direction of our bearish thesis on the Japanese yen has certainly become consensus over the past few months – speculators were net long the JPY to the tune of 21.9k contracts back in late SEP (vs. 59.1k net short today) and the Bloomberg Consensus 2013 EOY USD/JPY forecast was for ¥84 then (vs. ¥93.5 now) – we still contend that market participants do not fully appreciate the scope and magnitude of the pending phase change in Japanese monetary policy.
- In fact, our previous call for the USD/JPY cross to hit ¥100 in this calendar year may ultimately prove not bearish enough if the Abe administration continues to encounter limited blowback to their Policies To Inflate.
- The G7 “bows” to Japan: Today, the G7 released a statement designed to assuage growing – albeit late – fears of a Currency War by jointly pledging to avoid devaluing their respective exchange rates in the pursuit of stronger economic growth. “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” G7 finance ministers and central bank governors said in the statement, which was released today in London. Japan’s Finance Minister Taro Aso said the G7 acknowledged that Japan is not necessarily pursuing a weaker yen, but that its recent monetary and fiscal policy measures are aimed at overcoming entrenched deflation.
- Not fooling us: Who exactly are these people trying to kid? Everyone in that room and everyone who’ll attend this weekend’s G20 summit in Moscow knows full well that each of their respective countries are engaged in “beggar thy neighbor” currency policies to varying degrees. We personally find it odd that few in the Western media, if any, have spoken out against the Fed and ECB’s currency debasement strategies over the previous 2-3yrs. Now that Japan wants a turn in the devaluation driver’s seat, all ‘heck’ has broken loose…
- It’s Japan’s turn anyway: As we’ve quantified in our #Quadrill-yen presentation, it’s the BOJ’s rightful turn to take center stage in the competitive devaluation arena. Inclusive of the yen’s -17.7% decline vs. the USD since we outlined our bearish thesis back on 9/27/12, the Japanese currency is still up +13.9% vs. the dollar over the past 5yrs of debt, deficit and devaluation strategies employed by the US Treasury and Federal Reserve. With respect to the EUR, those deltas are -20.8% and +23.6%, respectively.
- … And Japan is poised to get real busy: Indeed, it would seem Japanese policymakers have a lot of hay to bale if they are to continue to make up for previously lost ground during this multi-year Currency War. With the relatively hawkish Masaaki Shirakawa stepping down early as BOJ governor on MAR 19 (along with his two deputy governors), we continue to believe a new era of unprecedented monetary policy aggression is coming to Japan with full support from the Abe administration.
- The Japanese bond market agrees: Japan’s bond market is definitely starting to agree with our call for the BOJ’s balance sheet and policy toolkit to expand in a relatively aggressive and potentially creative manner over the intermediate-to-long term:
- 5Y nominal JGB yields hit a record low today (0.138%) on speculation that the BOJ will eventually increase the duration of its purchases;
- Japan's 5Y breakeven inflation rate hit a new all-time high of 1.05% today; and
- Also, the spread between 30Y and 10Y nominal JGB yields reached 122ps wide today – a mere 9bps shy of the all-time wides reached in NOV ’00.
- The BOJ leadership transition remains a key catalyst: Potential candidates to replace Shirakawa include: Asian Development Bank President Haruhiko Kuroda, former BOJ Deputy Governor Toshiro Muto and former BOJ Deputy Governor Kazumasa Iwata.
- In his latest [shameless] campaign plug, Kuroda – who once wrote that the BOJ should pursue a +3% inflation target – spoke out today calling for more aggressive easing out of the BOJ: “The Bank of Japan could usher in a growth spurt unseen in a generation by stepping up stimulus and ending deflation… Japan, along with other nations, has really substantial room for monetary easing… There’s the equivalent of trillions of dollars of financial assets that could be bought by the BOJ.”
- Muto, chairman of the Daiwa Institute of Research, said in an recent interview that he’s revised his views on monetary policy from 2007. Then, as a deputy governor, he repeatedly said that keeping interest rates too low could be problematic for the economy. Contrast that with his recent commentary: “Ending deflation is the top priority and a policy of monetary easing is justified… No potential monetary step should be considered taboo.”
- Iwata, head of the Japan Center for Economic Research, has championed the idea of the central bank buying foreign-currency bonds to help weaken the yen – a proposal the LDP is said to be considering, as it would require approval from the Finance Ministry. Some of his recent comments indicate he may be just as aggressive as Kuroda appears to be: “Deflation and strong yen can be overcome with monetary policy alone… The central bank governor should be prepared to resign if targets are missed… The BOJ law should be changed to oblige the central bank to publicly explain should inflation be more than 1 percentage point off target.”
- T-minus 2-3 weeks: The Abe administration plans to officially introduce its endorsed candidates to the Diet for vetting at the end of this month. Regarding the appointment process specifically, it should be noted that no party has an outright majority in the Upper House of the Diet/House of Councillors, which is on equal footing with the Lower House/House of Representatives as it relates to approving appointments to the BOJ board.
- Will the LDP get “their guy”?: That means the LDP and NKP (83 and 19 seats respectively) will have to gain the support of smaller regional parties to push through any of their preferred, ultra-dovish candidates. Eleven votes from Your Party – which has rhetorically aligned themselves with the LDP-NKP platform on this agenda – would put them at 113 seats, leaving them 9 seats shy of a decisive victory, but still well within reach because we think the smaller parties will be more inclined to associate themselves with the LDP’s drive to reflate the Japanese economy ahead of the JUL ’13 Upper House elections, rather than side with the DPJ, which was blown out in the DEC Lower House elections.
- Where to from here?: While the direction of our bearish thesis on the Japanese yen has certainly become consensus over the past few months – speculators were net long the JPY to the tune of 21.9k contracts back in late SEP (vs. 59.1k net short today) and the Bloomberg Consensus 2013 EOY USD/JPY forecast was for ¥84 then (vs. ¥93.5 now) – we still contend that market participants do not fully appreciate the scope and magnitude of the pending phase change in Japanese monetary policy. Our previous call for the USD/JPY cross to hit ¥100 in this calendar year may ultimately prove not bearish enough if the Abe administration continues to encounter limited blowback to their Policies To Inflate.
- Why?: Because “they” said so. Macro investing ≠ micro investing. In macro investing, people (i.e. policymakers) have a funny way of determining what is and isn’t priced in on the fly. Just because a macro trade has become consensus doesn’t mean it will cease to work (think: gold and US Treasury bonds over the past 10yrs).