Bank of Japan No Change to Policy But Pressure Building.
The Bank OF Japan meets on Friday and forecasters don’t expect any changes in policy and see further weakness towards 160.00. The intervention has only had a mild impact and can’t stop the yen from falling longer term so will we get a change of policy? It's not the majority view but the pressure to tweak policy is high.
Japanese Inflation on the Rise
The Bank of Japan’s CPI forecast is expected to be pushed up from its current 2.3%, due to the fact we already have inflation at 3%, which is an 8-year high, and price pressures remain to the upside:
Japanese ruling party secretary general Toshimitsu Motegi this week announced a package aimed at softening the blow from rising living costs with a total of around 26 trillion yen ($174 billion) This of course will add to inflationary pressure which is already gaining traction to the upside:
Motegi said an early rate hike would do more harm than good for the economy. "It should be a process over about one year, and it would be difficult to suddenly raise interest rates” but he added: "that was not the same thing as not reviewing the current bold monetary easing policy at all,"
What does this mean? Does it mean the BoJ Could end negative rates which is not a hike but would be welcomed by consumers, and businesses and have a major impact on global markets:
“Even a modest tweak to the Bank of Japan’s entrenched monetary policy could set a wrecking ball in motion through worldwide markets if traders project the last heavyweight anchor stopping global yields from rocketing further is finally shifting.” (Japan Times)
FX Intervention Doesn't Work So Why Continue?
There is mounting opposition to a weak Yen from both businesses and consumers and intervention won't work long term as Nordea note:
“FX intervention involves the selling of US Treasuries, which adds upwards pressure on US rates and leads to a stronger USD in isolation. This FX intervention USD doom-loop (illustrated below from the perspective of Japan) could lead to dollar overshooting – especially when several central banks are enforcing the loop.” (NORDEA)
With the intervention of limited use and politically a move up to 160.00 is disastrous – Sure the Bank of Japan could continue with negative rates and yield control but this strategy isn’t working the Bank of Japan are losing credibility maybe its time for just a small tweak to policy and if it occurs Yen upside is huge.
The Potential for Capital Inflows to Japan
Japan is the biggest creditor nation in the world. Its net international investment position, the difference between the assets it holds overseas and Japanese assets held by foreigners, was $3.29 trillion at the end of June.
International Monetary Fund figures show that of Japan's $9.96 trillion assets overseas, around $3.7 trillion are in equity investments, and $5.7 trillion in bonds, including official reserves.
If just a small proportion is repatriated, the move in the Yen would be massive if we look historically repatriation of overseas investments tends to be reflected in an outsized yen move.
The Yen has fallen hard against the USD and could mount a rally so how far could the Yen rally and what are the key technical levels to look out for?
Key technical levels to look out for below and the logic of trading the unexpected which has little risk and huge upside potential.