Japan’s Contradictory Stance Leaves Yen at Risk of Further Slide

(Bloomberg) — Japan’s increasingly incongruous policy stance aimed at securing both stable growth and inflation is adding to the likelihood of further yen losses, even as officials warn of possible intervention.

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Just this week, as Finance Minister Shunichi Suzuki was warning he would step into markets to shore up the currency if needed, the Bank of Japan was boosting bond purchases to keep yields low — a move that widens the policy differentials with the rest of world and weakens the yen.

The central bank spent 1.42 trillion yen ($9.9 billion) on government debt to protect its artificially low yield cap on Wednesday and Thursday alone. Even after taking the passage of time into account, that sum dwarfs the 231 billion yen the country used the last time it intervened to support the currency in June 1998.

Adding to the conflicting signals this week, Prime Minister Fumio Kishida chose to flag the attractiveness of the weakening local currency for companies looking to bring their production facilities back in Japan. That hardly chimed with Suzuki’s repeated hints that the authorities will intervene if moves are too rapid.

Amid these apparent contradictions, the takeaway for yen bears appears to be that they can still keep pushing the currency lower as long as they don’t go too fast.

A major driver of yen weakness has been the widening yield gap between policy rates in the US and Japan. That spread is set to expand even further next week with the Federal Reserve potentially opting for a hike of as much as 100 basis points on Sept. 21, while the BOJ is expected to reaffirm its commitment to rock-bottom borrowing costs the following day.

“This kabuki dance is unsustainable,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management in Singapore. “Heightened verbal intervention reveals both a concern about the speed of potential inflation impacts and also –- contradictorily — a willingness to purchase more JGBs, which ultimately undermines the defense of the yen.”

The yen is far from being alone. The vast majority of its global peers have also wilted against the dollar in recent months as the Fed has turned increasing hawkish. Even so, Japan’s currency is the worst performer in the Group of 10 this year, having tumbled more than 19%.

Strategists around the world are predicting further losses. Goldman Sachs Group Inc. said this week the yen may decline to 155 per dollar if US Treasury yields keep rising, while HSBC Holdings Inc. said last week it may fall beyond 145. RBC Capital Markets is tipping it to end the year at 147, based on Bloomberg surveys. The currency closed at 142.02 on Friday.

While the sinking yen is putting pressure on BOJ Governor Haruhiko Kuroda to allow bonds yields to rise, there are few signs he will back down. His recent comments suggest he is determined to stick to an accommodative policy to revive growth as he has done through his decade-long tenure as head of the central bank.

The nation’s preferred gauge of inflation — consumer prices excluding fresh food — accelerated to 2.4% in July, the fastest pace since 2008. Still, that’s far below the levels in other developed countries despite Japan’s heavy reliance on imported energy and food. Kuroda has repeatedly said the uptick won’t last without bigger wage gains — and therefore rates must stay low until a lasting growth cycle is in place.

The BOJ will keep its benchmark rate at minus 0.1% next week, according to all 49 economists surveyed by Bloomberg. The central bank won’t adjust policy until the yen weakens to 150, according to the median reply to one of the other questions asked in the survey.

Buying Time

“Kuroda is certain that some kind of small rate hike won’t make much difference for the yen as can be been seen in the depreciation of multiple currencies including the Korean won,” said Jin Kenzaki, head of Japan research at Societe Generale SA in Tokyo. For now, the authorities just want to buy time until the dollar pressure subsides when the end of the Fed rate cycle comes into view, he said.

Traders are skeptical the BOJ can hold out indefinitely. Swap rates betting on a shift in policy have been creeping higher, with those on 10-year contracts about 20 basis points above the BOJ’s 0.25% line in the sand for bond yields. That’s still below the level of almost 0.6% reached in June, when surging global yields fueled speculation the central bank would capitulate.

Prime Minister Kishida last week announced the continuation of fuel and animal feed subsidies, plus cash handouts for low-income households aimed at alleviating the pain of soaring energy and food prices. As those costs are being amplified by the weak yen, the administration is essentially giving the BOJ a green light to keep going no matter what happens to the currency.

“Japan’s economic policy is getting complicated, but it’s a reflection of each entity’s view on what’s best for the economy,” Societe Generale’s Kenzaki said. “The bottom line is that Kuroda won’t and can’t give up his easing stance. Kishida gets that and so now he is starting to focus on taking advantage of the weak yen.”