Japanese yen’s slide resumes amid foreigners selling JGBs

Summer trading means declining volatility and ranging markets, but traders may be in for something different this year. One of the reasons is the Japanese yen’s slide, which triggered ample moves in the FX market and, indirectly, in other ones.

The Japanese yen’s depreciation is nothing short of impressive. It has exceeded 20% since March, a staggering level.

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But it is not the first time we’ve seen such moves. Also, it is not the first time that the Bank of Japan (BOJ) has gone full ballistic in its efforts to bring inflation to the target.

It failed to do so for such a long time, as every effort to bring inflation up from close to zero or below, failed. Now it has a decent chance as energy prices are on the rise everywhere in the world, and inflation increased to levels not seen in decades.

It timidly increased in Japan too. But it will not stop the BOJ from easing and diverging from other central banks. If anything, this is the BOJ’s chance to clear its reputation and re-establish trust in its ability to generate inflation as defined by its price stability target.

Foreigners sell JGBs at an accelerating pace

One of the most interesting charts that made the rounds these last days shows the capital flow data into and out of JGBs or Japanese Government Bonds. It reveals that last week foreigners dramatically reduced their holdings of JGBs, selling close to $40 billion in one week alone.

Everybody knows who the buyer is – the Bank of Japan. In an effort to keep the yields under control, the Bank of Japan buys all the bonds it can get.

It now holds more than half of all the JGBs – a record. Thus, there is an explanation for the ongoing yen weakness.

So will the yen’s depreciation stop during the summer? Unlikely.

The BOJ may verbally intervene from time to time, jittering that a weak yen is bad for the economy. But the market has already begun to price in rate hikes in other major economies in the world.

For instance, the market now has priced in some rate hikes from the Fed in 2023. Also, the European Central Bank sees its window of hiking rates closing this summer.

To sum up, one should not discount the possibility that the BOJ will keep easing until other central banks start doing so. In other words, it is more likely that the BOJ will not be part of the current global tightening cycle.

In this case, the yen’s slide has only started.