Yen Traders' Nerves Jangle on Growing Signs of BOJ Hawkish Pivot
Comment of the Day

December 19 2022

Commentary by Eoin Treacy

Yen Traders' Nerves Jangle on Growing Signs of BOJ Hawkish Pivot

This article from Bloomberg may be of interest to subscribers. Here is a section: 

The yen whipsawed in Monday trade after reports on a potential change to a key agreement between the government and central bank fueled speculation policy makers are moving closer to a hawkish pivot. 

Japan’s currency jumped as much as 0.6% after Kyodo said on Saturday that Prime Minister Fumio Kishida may seek to revise a decade-old accord with the Bank of Japan and consider adding flexibility to the 2% inflation goal, potentially paving the way for an end to its ultra-dovish policy. The yen pared gains after a top government spokesman denied the report.

The existing agreement commits the government and the BOJ to achieving its 2% inflation goal as early as possible. 

The BOJ has long since missed Kuroda’s original timeline of around two years. Still, removal of the phrase would go a step further in recognizing that achieving stable inflation is a longer term goal while implying that factors other than time also need to be considered.

Eoin Treacy's view

Japan has been trying to achieve its inflation target for a lot longer than two years. The challenge in the past was the global economy was going through a long-term disinflationary trend at the same time Japan was going through a deflating property bubble. Attempting to inflate while companies were moving jobs and manufacturing capacity offshore was a challenge. Today, the aging population and depressed consumer demand are headwinds to inflation.

The challenge presented by the current yield curve control mechanism, which only targets the 10-year, is yields on every longer maturity are expanding. The 30-year yield continues to trend higher in a consistent manner.
The Yen continues to pause in the region of the trend mean and a sustained move below JPY133 would be required to signal a return to demand dominance beyond the short term.
The Topix Banks Index continues to hold the breakout to new four-year highs. That’s at least a partial vindication of the BoJ’s efforts to support consumer demand.

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