They will never hand full control over yields to the market.
By Wolf Richter for WOLF STREET.
The yen dropped to ¥151.92 per $1 earlier today, approaching within a hair the intraday low of October 2022, then rebounded sharply to 151.22, but then fell again to 151.72 at the moment.
Finance Minister Shunichi Suzuki said earlier today that the government would monitor the situation and respond appropriately. And that was the response. The chart show hourly increments:
That USD/JPY of 152 was a trigger mark today. There were about $1.25 billion in options contracts that expired at 10 a.m. ET today with a 152 strike price, according to Reuters. Another $2.2 billion will expire on Wednesday.
And the yen’s sharp but short-lived rebound against the dollar earlier today was not due to Bank of Japan intervention, but due to the options expiry, Marc Chandler, chief market strategist at Bannockburn Global Forex, told Reuters.
The plunge and gyrations of the yen started in September 2021, when the Fed communicated that it would begin tightening in reaction to inflation that had begun to rage. Until then, the yen traded at around ¥110 to the USD, and had been in that range for years.
By October 2022, as the yen was plunging chaotically toward the ¥150 range and threatened to blow through it, the duo of Finance Ministry and the Bank of Japan engineered large waves of selling dollar-denominated securities and buying yen to stop the decline – which worked, and the yen eventually rebounded some. But that didn’t last – and it’s back where it was, but this time, the duo just let it move:
Adios, international purchasing power.
An exchange rate of ¥151 to $1 means that consumers and businesses in Japan have lost roughly 27% of their purchasing power since 2021 with regards to imports, including foods and energy products, and with regards to foreign acquisitions and foreign travels. So Japanese consumers and businesses are going to shift spending back to Japan, and they’re paying a whole lot more for imports. That’s the purpose.
The Bank of Japan, the last central bank still clinging to a negative policy rate but now undertaking baby steps away from it, has pursued a well-communicated strategy of fueling inflation, and the government has been supporting those inflation efforts with subsidies and stimulus budgets.
And it seems the Japanese authorities are now angling for a permanently lower yen, perhaps in the ¥150 range or even lower, though they’re not allowed to communicate such plans because that would be considered currency manipulation. So it’s all a little delicate.
But the situation has to remain under control of the government and the BOJ. There must not be any currency chaos. And when things move too fast, they step in. But when things move slowly and orderly to the same place, they let it go.
Snail-paced exit from NIRP and Yield Curve Control.
Back in 2016, the Bank of Japan followed the European idiocy and cut its one-month policy rate into the negative, to -0.1%, and it’s still at that negative rate. But it has given indications that it will move away from its negative interest rate policy (NIRP).
In preparation, to avoid an inversion of the yield curve, it has loosened its Yield Curve Control in several steps. For years, with Yield Curve Control, the BOJ had locked down the 10-year yield at first below 0.10%, and then below 0.25%, by buying Japanese Government Bonds (JGBs) to defend those levels.
On December 20, 2022, it then raised the cap of the 10-year yield to 0.5%, which caused all kinds of gyrations, as you can see in the chart below.
This year, the BOJ raised the cap to 1.0%, and then in October it said that the 1.0% cap wasn’t a fixed cap anymore, but a loose “upper bound,” and the 10-year yield has been zigzagging toward that level, right now at 0.88%:
Keeping the yield curve steep while tightening.
Locking down the short-term policy rate into the negative still while allowing the long-term yields to rise has prevented the yield curve from inverting – a phenomenon that has occurred in the US and has spawned 18 months of incessant recession-mongering.
The Japanese yield curve, by contrast to the US yield curve, is fairly steep, as controlled as it is, with the short end at -0.2% (below the BOJ’s policy rate), the 1-year yield at -0.05%, the 2-year yield at 0.10%, the 5-year at 0.43%; the 10-year at 0.88%, the 20-year at 1.58%, the 30-year at 1.78%, and the 40-year at 1.86%.
No Love for Markets.
The Japanese authorities have never been believers in a true market for government bonds. The government and the BOJ will never allow markets to do their thing with Japanese government bond yields. They will always be more or less controlled. It’s just a question of how much control they exercise.
The BOJ holds over half of the JGBs out there, and big government institutions hold another big load. Other Japanese institutions that the government and the BOJ can lean on hold another big pile. There is not much of a market left.
Moody’s – which this weekend kept the US credit rating at triple-A, and only lowered its outlook for that Triple-A rating to negative (meaning, it may lower the rating in the future) – has long ago cut Japan’s credit rating to A1, four notches below the US rating (my cheat sheet of bond credit ratings). And it’s just decoration and doesn’t matter because there is no free market for Japanese government bonds.
The entire situation has to remain under control of the government and the BOJ: The pace of the destruction of the yen’s exchange rate, the pace of inflation, the pace of the rise in government bond yields, and the yield curve. There must not be any currency turmoil or yield turmoil. And when things move too fast, authorities step in. But we can see the shift in policies toward a lower yen and higher yields.
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