It's only a matter of time.

It may be a matter of time.

But timing can be the hard part!

The Bank of Japan has been one of the few Central Banks left running its aggressive monetary policy. The Japanese Yen often acts as safe haven currency. This is due to Japan having Balance of Payment surpluses and being a net creditor to the rest of the world.

The magnitude of BoJ policy along with a strong market view on policy has dramatically weakened the Yen. Despite Russia/Ukraine kicking off at the beginning of the year, we didn’t see much Yen strength across the board.

I prefer to look at what the Yen is doing relative to other major currencies to get an unbiased view. Lets take a look

The yen comparitively didn’t strengthen much when the war started. In my opinion, this really shows how strongly markets have speculated on easy monetary policy in the Japanese economy.

The S&P 500 saw an initial drop the following weeks. Other factors driving this sell off:

1. Federal Reserve increasing rates

2. Inflationary environment

3. Russia/Ukraine

Negative correlation has turned positive

When volatility increases inside equities or global risk turns pessimistic, the Yen often will strengthen(negative correlation).

After the 2020 crash, we had the Yen index stay very negatively correlated to risk & equities. As of July 2022, we have mainted a stronger positivie correlation.

Take a look at URTH, which tracks developed market companies around the world.

It’s only a matter of time

When watching Central Banks, it is important to keep close intel on rhetoric and notice how they are referencing the economy, currency & rates.

Over the last couple months we have seen a slight change in tone about the Yen weakness.

June 6th: Kuroda mentions that a currency move is positive as long as they are stable.

July 21st: Kuroda mentions continuation with their easing policies. There was also talk about monitoring the currencies movements.

September 9: Kuroda now issues a “warning” on rapid yen moves

Going forward we will be closely monitoring the Bank of Japan and looking for more intel about a switch up in the Banks policies. This could give rise to a sharp reversal in the Yen. It’s a possibility the Bank will end up adjusting their Yield Curve Control(YCC)

YCC

Generally, a weaker currency can benefit an economy by making exports more desirable to other countries. Purchasing power..

The goal of YCC is to keep short term & long term rates lower or on a decline. Lower rates to spur growth. I have linked a YCC breakdown from the BoJs site

Its no secret that Japan has struggled maintaining their 2% inflation target. For the last 25 years, Japan averages well below 2% inflation. Often going into periods of deflation, below 0%. By pinning short & long term rates, the goal has been to keep Japan in a healthy inflation zone with hopes consumers will increase economic activity.

Here is another great break down by Liberty Street Economics

With Inflation holding currently above the BoJs target of 2%, it will be important to watch the BoJ from here on out. As Yen weakens, this can increase import prices inside Japan which tends to correlate with higher domestic inflation. As the next couple quarters come into view, we need to watch for rhetoric or clues with the BoJ. If Inflation does continue on its upwards path, this could mean the bank could end up reducing their powerful monetary policies.

We shall see if it ends up being a matter of time.

FS