China Won’t Be Happy As Race To 150 Yen Resumes

Yen bulls are feeling a sudden burst of buyer’s remorse as Bank of Japan Governor nominee Kazuo Ueda signaled he may keep Tokyo’s printing presses on the “high” setting indefinitely.

I’d say “if he’s confirmed” here. But considering Ueda told Tokyo politicians exactly what they wanted to hear on Monday, he’s now an even surer bet to replace the outgoing Haruhiko Kuroda. This suggests, in turn, that it’s also a safer bet that BOJ “tapering” moves won’t happen anytime soon, never mind outright tightening moves.

And that’s a shame. After 20-plus years of zero interest rates, quantitative easing and some of the most aggressive fiscal stimulus in modern history, it’s high time Japan took off the economic training wheels. More than two decades of the biggest corporate welfare ever unleashed isn’t boosting wages, rekindling innovation, increasing productivity or keeping Japan in the game as China’s dominance rises.

Even after Kuroda upped the monetary-steroid dosage beginning in 2013, Japan’s economy grew only modestly on average. Really, if time travel were possible, today’s BOJ officials might return to 1999 to warn then-Governor Masaru Hayami against going down the zero rate/QE rabbit hole.

But today, Tokyo is more addicted than ever to the BOJ’s unlimited monetary open bar. Come April, it will fall to Ueda to try his hand at finding an exit. Or at least limiting the excessive liquidity deadening Japan Inc.’s animal spirits and dissuading lawmakers from making tough decisions.

Ueda could still surprise us. The Massachusetts Institute of Technology-trained economist displayed flashes of independent thinking during his 1998-2005 stint as BOJ board member. But if Kuroda won’t take this immense store of political capital out for a ride, and even just telegraph the need to graduate from QE, what hope might Ueda have in the next year or two?

Kuroda, remember, hinted at a pivot back on December 20, when the BOJ said it would let the 10-year yield rise as high as 0.5%. The BOJ, though, saw the violent reaction in markets. The skyrocketing yen spooked markets everywhere.

The BOJ flinched. Kuroda’s team spent the two weeks after December 20 engineering countless unscheduled bond purchases to communicate that BOJ policy is still the same.

Today, Ueda confirmed that the BOJ’s retreat was no aberration. It was music to the ears of most lawmakers to hear Ueda say: “I think it’s appropriate for monetary easing to be continued. In order for policy to be revised, I think there needs to be a major improvement in the price trend.”

In other words, autopilot. This, not surprisingly, has many of the yen bulls throwing in the towel. And it could signal that the Japanese currency may resume its test of the 150 level to the dollar, much to China’s chagrin.

Last year, as the yen’s slide accelerated, economists like Jim O’Neill, formerly of Goldman Sachs, warned it might prod Beijing to follow suit. O’Neill is best known for coining the BRICs concept grouping Brazil, Russia, India and China. His concern that a weaker yen might trigger another 1997-like Asian financial crisis raised many an eyebrow.

If the yen’s declines deepen, as O’Neill put it, Chinese leader Xi Jinping “will see this as an unfair competitive advantage so the parallels to the Asian financial crisis are perfectly obvious. China would not want this devaluing of currencies to threaten their economy.”

Importantly, Ueda isn’t just dousing speculation that the BOJ will pivot to a more hawkish crouch. He’s signaling that the central bank of the third-biggest economy could instead open the monetary spigot even wider. With the Federal Reserve in Washington telegraphing more U.S. rate hikes to come, they might accelerate the yen’s rendezvous with the 150 level—or even beyond.

The reason China wouldn’t be happy is that its economy is still taking hits from the Covid-19 era. Xi’s sudden reopening from “zero Covid” lockdowns isn’t juicing consumer spending as hoped. Alibaba Group’s lackluster sales figures suggest Asia’s biggest economy has more to do to restore pre-Covid growth rates.

Japan has much more to do, too. Since 2013, the BOJ’s balance sheet has topped the size of Japan’s entire $4.9 trillion economy. The reason it hasn’t succeeded in getting the economy out of first gear is a dearth of structural reforms. Since the early-2000s, government after government pledged a supply-side Big Bang that never seems to arrive. Though the BOJ’s cash keeps the economy stable, businesses and households lack confidence to help power a sustainable recovery.

Hence lawmakers’ sense of relief Monday to hear Ueda insist he’s likely to take the monetary path of least resistance. If you’re China, though, it’s a sign that 2023 could be a bump year for Asia’s currency markets.