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Takeaway: The latest confirmations of governor and deputy governors of the BOJ is structurally bearish for the yen.

This note was originally published March 15, 2013 at 16:20 in Macro

SUMMARY CONCLUSIONS:

  • The confirmation of Haruhiko Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the Bank of Japan (BOJ)is structurally bearish for the Japanese yen. Much like consensus had become numb to high inflation and economic volatility in the US during the 1970s, consensus has become equally as numb to deflation and no growth in Japan over the past approximately 20 years. Former Fed chief Paul Volcker’s aggressive hawkishness changed the US’s circumstances in the early 80s; we expect Kuroda & Co. to attempt to do the same in Japan (only via aggressive dovishness) in the months and quarters to come.
  • All told, we remain the bears on the Japanese yen vis-à-vis the US dollar and expect further material depreciation over the intermediate-term TREND and long-term TAIL. Much like the Chavez’s Venezuela and the Weimar Republic before it, we also expect Japan’s currency-debasing Policies To Inflate to continue inflating the Japanese equity market as well.
  • And if the dollar-yen trade has indeed run its course (the dollar-yen cross is up nearly 24% since we authored this thesis on September 27 of last year) and we’re just totally wrong on the yen from here because the BOJ likely disappoints what are admittedly elevated market expectations, then there’s over -31% downside from today’s closing price to the November lows in both the Nikkei 225 and TOPIX indices – markets that have become stapled to ski lifts on int’l flows and policy hopium. It should be duly noted that the broad balance of Japanese high-frequency economic data and growth expectations remain squarely in the dog house.

ABE SCORES!

After weeks of media speculation, parliamentary deliberation and general consternation, the candidacies of Haruhiko Kuroda (Governor), Hiroshi Nakaso (Deputy Governor) and Kikuo Iwata (Deputy Governor) were approved by Japanese parliament and are poised to officially take over the BOJ on March 20. NOTE: Kuroda will have to reappear in front of the Diet again in early APR to secure “official” approval for his five-year term as a result of Shirakawa’s early exit; he’s got the highest parliamentary approval rating of all three, so we expect little-to-no hiccups there.

JAPAN’S “INVERSE VOLCKER MOMENT”

As long as the LDP has its heart set on taking the Upper House via election in late July and “5% monetary math” (+2% inflation and +3% nominal growth) at the core of the Abe administration’s economic agenda, it would be a fool’s folly to sit here and expect that BOJ isn’t poised to “do whatever it takes” (per Draghi and, now, Kuroda) to achieve those goals – at least the latter of the two.

Much like consensus had become numb to high inflation and economic volatility in the US during the 1970s, consensus has become equally as numb to deflation and no growth in Japan over the past ~20 years. Paul Volcker’s aggressive hawkishness changed the US’s circumstances in the early 80s; we expect Kuroda & Co. to attempt to do the same in Japan (only via aggressive dovishness) in the months and quarters to come.

The following chart shows just how much of an economic phase change the Abe administration is trying to perpetuate in Japan. He’ll need – or, more importantly, he thinks he’ll need – a lot of “CTRL+P” from the BOJ to get there.

JAPAN’S INVERSE VOLCKER MOMENT - 1

To the extent they do not make material progress in working towards those targets, however, we expect to see a marked acceleration of both external and self-imposed political pressure upon the holdovers on BOJ board to step up and embrace change – with the threat of a reduction in the central bank’s autonomy currently imposed by the 1998 BOJ Act always hanging in the background.

CONSENSUS STILL DOESN’T GET IT

In a research note on Monday, we detailed exactly why we think consensus among the buy side, the sell side and Japanese corporations is not even in the area code of being bearish enough on the Japanese yen. In that vein, this morning, former MOF official Eisuke Sakakibara (known as "Mr. Yen" during his tenure) was out making the case that the USD/JPY cross won’t breach 100 – despite the aforementioned phase change in Japanese monetary policy.

What people like Mr. Sakakibara are missing is that the BOJ now has the baton as it relates to being the most aggressive DM central bank. Currencies crosses are inherently relative, so as Japan accelerates its easing measures, keep in mind that the US will be doing the exact opposite – both fiscally and monetarily – as #GrowthStabilizes in the good ol’ U-S-of-A.

JAPAN’S INVERSE VOLCKER MOMENT - 2

And if the dollar-yen trade has indeed run its course  and we’re just totally wrong on the yen from here because the BOJ likely disappoints what are admittedly elevated market expectations, then there’s over -31% downside from today’s closing price to the NOV lows in both the Nikkei 225 and TOPIX indices – markets that have become stapled to ski lifts on int’l flows and policy hopium. It should be duly noted that the broad balance of Japanese high-frequency economic data and growth expectations remain squarely in the dog house.

 

JAPAN’S INVERSE VOLCKER MOMENT - 3

 

JAPAN’S INVERSE VOLCKER MOMENT - 4

 

JAPAN’S INVERSE VOLCKER MOMENT - 5

 

JAPAN’S INVERSE VOLCKER MOMENT - 6

All told, we remain the bears on the Japanese yen vis-à-vis the USD and expect further material depreciation over the intermediate-term TREND and long-term TAIL. Much like the Chavez’s Venezuela and the Weimar Republic before it, we also expect Japan’s currency-debasing Policies To Inflate to continue inflating the Japanese equity market as well.