BOJ Intervention Alert: Japan March Inflation Figures
As the USDJPY gets dangerously close to the 155 handle, there is increasing wonder why the BOJ hasn’t stepped in to shore up the Japanese currency. That’s well above the last time authorities stepped in to stop the slide of their currency. In September of 2022, the USDJPY reached 152 before the Ministry of Finance stepped in, ordering the BOJ to defend the yen.
Tensions have ratcheted up in recent days as the yen continues to weaken against the dollar. The latest moves that have driven expectations were a trilateral meeting between Japanese, Korean and US officials precisely to address the sliding currency. But nothing has happened yet. Now the question is whether the upcoming data might jolt the market or push authorities into action.
The BOJ Has A Hard Nut to Crack
One of the main drivers of the weakness in the yen is carry trade driven by the wide differential in interest rates between Japan and other major economies. The Fed’s high interest rates as inflation comes down makes a compelling case to sell yen and buy dollars. This is the “fast” drop in the value of the yen that Japanese authorities are constantly “warning” about.
But, this situation is temporary. As the BOJ is expected to (very slowly) raise rates and the Fed will cut (at some point) in the future, the interest rate gap will narrow and the currency will normalize. Japan would like to see a weaker yen, because it helps their exports. But too weak becomes a problem for inflation. If the BOJ acts now to shore up the yen, it could then have the opposite problem a few months later when the current flows reverse and the yen naturally picks up strength as the interest rate gap narrows.
What to Do in the Meantime?
In the end, it’s a waiting game. If Japanese authorities can jawbone the market into not weakening too fast, then they can have their cake and eat it too. But for carry traders, continuing weakness in the yen is beneficial, and they could keep challenging the BOJ. And the central bank can’t get too distracted from its main mission by the foreign exchange problem.
Inflation in Japan is running hot, and expected to be above target in the near term. In fact, March inflation is forecast to remain at 2.8% growth, well above the BOJ’s 2.0% target. But the so-called “core-core rate” which could be more influential for the BOJ, that’s expected to be even higher at 3.0%, though come down from 3.2% prior.
Figuring Out Where Things Go From Here
The inflation rate also shows a similar problem as FX: The BOJ’s models suggest that CPI will come down later in the year as the economy stalls out. Which means the central bank can’t pull out its big guns, just yet. Those big guns would be a surprise rate hike, or other form of monetary tightening like giving up on buying JGBs. If it tightens too much now, then when inflation comes down in a few months, it will be too restrictive.
While the BOJ has good reasons to try to hold on to its current policy course, that doesn’t mean that intervention is completely off the table. An exceedingly weak yen is not desirable to Japan’s other major trade partners either, including the US. Coordinated intervention between the BOJ and the Fed could have a much bigger impact than what was seen in 2022. The question is at what level will they decide to pull the trigger. considering the implications of March Inflation figures and other economic indicators.
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