Friday, October 27, 2023

Weaker Yen to pit Japan against China

The public attention and concern in Malaysia is on the weakening Ringgit vis-a-vis US dollar. Deputy Minister of Finance, Dato Ahmad Maslan explained the reasons as external in Parliament. Except for this blog's geo-global political take, similar reasons given

Nevertheless, there is a more interesting development on Yen. US dollar rose against Yen to touch the 150.00 level briefly for the second time early this week. It is only the fear of intervention by the Bank of Japan (BOJ) that is holding it from breaking the key psychological level. 

The intervention to tame the volatility is making the short term Yen movement appear unnatural. Early October intervention failed to stem the fall and Yen is still hovering at sub-150.00 level. 

Underpinned by the interest rate differential favouring the US dollar, it is a matter of time for dollar Yen to pierce through.  

US interest rate is expected to move up while Japanese short-term interest rate remain at zero level. It seemed US condoned a weaker Yen and not mind a stronger Japanese export. It was the G7 policy in the 80s that strengthened Yen to address the American twin deficit in trade and current account. 

In view of the rise of China as a new economic power, is there a shift in the political economic policy on Japan?

Stronger dollar, weaker Yen 

Extract from Malaysia Reserve's Bloomberg report two days ago:

“Dollar-yen broke the 150 line during hours with low liquidity and less participants, probably led by speculators,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. in Tokyo. “The topside of the currency pair is likely to become heavier in the Tokyo trading hours amid growing concerns about intervention, especially above the 150 line. People will continue to stay nervous.”

The wide interest rate divide with the US is seen in the Treasury 10-year yield at 4.91%, which is almost six times that of Japan’s equivalent at 0.835%. The divergence in monetary settings is fueling the gap and Bank of Japan Governor Kazuo Ueda said Friday that the BOJ will continue patiently to keep settings accommodative in order to achieve the goal of stable and sustainable 2% inflation.

Traders are on tenterhooks with a BOJ policy meeting approaching on Oct. 30-31, and tensions in the Middle East increasing uncertainty in global markets. Safe havens including the dollar, the yen and the Swiss franc remained in focus Monday following news that an airbase in Iraq that hosts US and international forces was targeted overnight by rockets in an ongoing escalation of hostilities drawing in regional militia.

Investors are also digesting a Nikkei report that the BOJ officials are pondering the question of whether to tweak the settings of the yield-curve control program as domestic long-term interest rates float higher in tandem with those in the US, the Nikkei newspaper reported. It didn’t say where it obtained the information.

“If the BOJ wants to see a stronger yen, I think they will need to do more than just widen the band yet again,” Rodrigo Catril, currency strategist at National Australia Bank in Sydney, said of the YCC program. “The market is right to be cautious.”

Higher Japanese interest rates

The low interest rate regime in Japan have been around since 2016 to prop the stagnant economy from the 1990s. The rate was already low that there was no need for easier monetary policy during the pandemic.   

When US raise interest rate to combat inflation, US dollar rose and Yen faced the present low. Cost of imported goods will rise in Japan but it is not an inflation that came with a stronger economy and rising demand for BOJ to be concerned. 

If BOJ remained adamant, Nikkei Asia reported on October 11th that Yen could weaken to 160.00 level. Extract below:

Stubborn interest rates

Intervening in this way might buy time, but the continuing slide highlights that merely buying yen in foreign currency markets will not solve the bigger problem: Japan's negative interest rates make it a global outlier and the yen a target for selling.

As the gap between U.S. and Japanese rates widens, analysts say the yen may fall past a 33-year low of 151.90 to the dollar, defying repeated warnings from Prime Minister Fumio Kishida's government of market intervention. In September, Bank of America Securities warned in a research note that the yen could fall as far as 160-165 to the dollar in 2024, if the U.S. Fed does not cut rates.

"We are watching currency market movements with a heightened sense of alert," Kishida said during his visit to New York on Sept. 21. "We do not rule out any measures to deal with excessive currency market movements."

The BOJ's new governor, Kazuo Ueda, billed as a pragmatist, took the helm in April amid questions about how long the bank would continue pumping cheap credit into the economy.

Such questions are more acute now given that Japan is seeing its highest inflation in decades. Last month came the answer: a little longer. "We have yet to foresee inflation stably and sustainably achieve our price target. That's why we must patiently maintain [an] ultraloose monetary policy," Ueda said in September.

Winners and losers

Many big Japanese companies have benefitted from the yen's depreciation, which is one reason the currency has tumbled so far without much reaction from the BOJ. "The yen is very important for earnings for Japanese exporters," said Jonathan Garner, chief Asia and emerging market equity strategist at Morgan Stanley. Exporters' sales are denominated in foreign currency, meaning that their value -- denominated in yen -- becomes larger the weaker the yen gets.

Japanese capital shift

Not only business sector will benefit but inevitably, inflation will creep in and BOJ has to address interest rate hike. The Star Online's report today Oct 24th from Bloomberg is anticipating repatriation of Japanese capital:     

When negative rates end, US Treasuries will suffer

Tokyo: Japan’s era of negative interest rates will end in coming months, and the implications for world markets will be enormous, with US Treasuries set to suffer the most, according to the latest Bloomberg Markets Live Pulse (MLIV) survey.

The Bank of Japan (BoJ) is likely to unwind its unusual policy of sub-zero rates during the first half of 2024, the majority of 315 respondents said. The move would bring an end to a bold experiment it embarked on in 2016 – one that’s recently placed Japan at odds with other major central banks that have been tightening aggressively to combat inflation.

What the BoJ does, and when it does it, will reverberate through world markets. The biggest consequence, according to MLIV Pulse respondents: more turbulence for the vast amount of US Treasuries. That’s because higher yields in Japan would encourage fund repatriation by Japanese investors whose huge holdings include US, European and Australian debt.

“A shift in the BoJ’s policy could slow the export of capital from Japan as yields become more attractive locally than they were before,” said Martin Whetton, head of financial markets strategy at Westpac Banking Corp in Sydney.

Thirty-seven per cent of participants said US Treasuries will face the most severe impact from governor Kazuo Ueda shifting away from super-accommodative policy. Declines in the US dollar may add to the misery, as 36% expect pain for the currency that the US debt is denominated in.

Portfolio managers and central banks around the world are keeping a watchful eye on any move by the BoJ, which has made negative rates and yield curve control the cornerstone of its policy to fight stagnant prices. It rocked global markets by raising the cap on benchmark 10-year bond yields in late 2022, and again at the end of July, pushing up bond yields. ......

Japanese investors are the biggest foreign holders of US government bonds, holding more than US$1.1 trillion. In anticipatiom of fall in Yen bond prices, insurance companies began dumping yen denominated foreign bonds since April. 

Can Malaysia benefit from this capital shift?

Coming back to the question, is the American not aware of the implication of Federal Reserve tightening monetary policy and strong US dollar on the economy and capital flow?

To what extend will there be the reversal of the concerted G7 effort of the 1980s for a stronger Yen will have to be seen. 

A weaker Yen will strengthen Japanese export capability, accelerate R&D and justfy technology upgrade. It is still premature to confirm but it could be a signal for another move in the US foreign policy against China. 

Other than pivot strategy of placing military bases surrounding China, semiconductor war, western boycott of Hua Wei, and weakening the Chinese economic structure via the banking and real estate sectors, weakening Yen will pit Japan against China. 

Perhaps South Korea too, but not Taiwan, whose too close to China.  

Malaysia benefited from the 80s to 90s megatrend to be the  manufacturing base for Japanese companies. But, that was the cheap labour era in which Malaysia is no more and now reliant on foreign labour. 

And, it is something for Rafizi to ponder while recovering from heart operation on how to take opportunity from the eventual capital shift. Capital would also be moving away from tense situations in Europe and Middle East. 

Have the young PKR leaders holding positions in government and aggressive in their pursuit for power ponder over such senario? 

When PH was in power the first time under Mahathir leadership, Malaysia passed on the opportunity of capital flight from Hong Kong during the umbrella revolution.

The foreign policies and relation under Saifuddin Abdullah suffered. Both PM7 and the Minister infuriated countries friendly to Malaysia. With a rather uncooperative PTD, a tall order awaits Anwar and Rafizi.

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