Abenomics, Yen and the BoJ
The finance minister said that a weaker yen was needed in order to boost the country’s exports as the government attempts to reverse years of stagnation as part of what is known as Abenomics, spearheaded by the Japanese Premier, Shinzo Abe. He said the government will take measures to counter the one-sided move in the currency markets.
The comments, however, are in stark contrast to what Shinzo Abe said earlier last week. In an interview with the Wall Street Journal, the Japanese premier said that countries must prevent actively devaluing their currency’s exchange rate in order to keep their exports competitive. His comments came just days after Janet Yellen’s dovish remarks sent the US dollar plummeting.
For the most part of last week, the markets were full of speculation that the BoJ could intervene in the markets, but doubts still lingered. The BoJ had earlier surprised investors when it announced a cut in its key lending rates moving it into negative in hopes of spurring investment and keeping the yen subdued. A move that has been seen by other central banks such as the Swiss National Bank which cut interest rates to -0.75%. While the yen did indeed weaken, it was only for so much before the currency pared losses and started to post a strong rally.
BoJ officials are known for verbally intervening in the markets. Last year, when USDJPY was trading near 125Yen, BoJ officials came down strongly against the rapid declines in the yen. Echoing this sentiment, Japan’s finance minister, Aso, told reports on Friday that the rapid appreciation or depreciation in the yen was not desirable and that currency should be more stable, matching the economy’s fundamentals. He said that G20 confirms the view that excess volatility and disorderly moves in the currency markets could affect economies, especially those that rely on exports. Mr. Aso said that Japanese officials were watching the currency moves as a matter of urgency and that necessary steps would be taken if need be. However, he declined to comment on the possibility of an intervention in the currency markets.
The recent rhetoric from Japan has been similar with various officials including the chief cabinet secretary Suga echoing the same comments. However, their hands seem to be tied, ahead of what many observers believe to be the upcoming G7 summit to be hosted by Shinzo Abe.
The rally in the yen has hit the Nikkei225 index quite hard. While it was the worst performing index in the first quarter, it has failed to show any signs of recovery, despite Friday’s modest moves in anticipation that the BoJ could step up stimulus.
Yen – To intervene or not?While speculation on whether Japanese officials will intervene in the markets or not is likely to stay at the forefront, some reports suggest that BoJ could stand pat. The reasoning behind this comes from Shinzo Abe’s interview with the WSJ where he spoke about not getting too involved in the exchange rate scheme. Japan has already been called out for its policies being targeted directly on the exchange rate and some believe that the BoJ’s actions have been a direct result of artificially keeping the yen lower. Moreover, as part of the trans-pacific deal which Japan has signed up to, countries are required not to directly intervene in the markets to artificially lower the exchange rates. Therefore, it is reasonable to expect the yen to strengthen further before we can expect any form of intervention from BoJ officials.