Jane Foley, a senior currency strategist at Rabobank, examines the recent gains of the Japanese yen (JPY) and raises doubts about whether the Bank of Japan (BOJ) is effectively managing inflation. She pointed out strong government bond auctions and a rise in foreign investments in Japanese government bonds, alongside the BOJ’s projections for inflation. However, she noted that ongoing fiscal concerns and cautious interest rate hikes may restrict a long-term recovery for the yen.
Bank of Japan credibility and yen performance
In August last year, U.S. Treasury Secretary George Bessent remarked that the BOJ was “behind the curve on inflation,” suggesting that it might consider increasing interest rates. He also warned about potential “leakage,” where rising Treasury yields could influence other bond markets, including U.S. Treasuries. Given that Japanese investors hold a significant portion of U.S. Treasuries, the U.S. Treasury is likely wary of raising rates. Bessent indicated that an increase in Japan’s government bond yields could impact how major Japanese insurance companies allocate their assets, possibly pulling away from U.S. markets.
The notion that the BOJ is lagging on inflation has notably affected sentiments in both the government bond market and the yen. Recently, a 30-year government bond auction achieved the highest bid-to-cover ratio since 2019, prompting questions about whether the market is easing concerns around Japan’s inflation and fiscal stability.
Interestingly, the Japanese yen has emerged as the top-performing G10 currency on a daily basis—a sentiment that’s been unusual for the yen this year. In fact, it has been the underperformer among G10 currencies over the past year.
As for core-core CPI inflation, it sat at a modest 1.8% year-on-year in May, which might clarify why the rate hiking cycle is moving slowly. This suggests that claims of policymakers being sluggish could be misplaced, as various CPI measures have notably decreased from last year’s peaks.
The BOJ’s accelerating rate hikes could support the yen, yet despite the strong bond auction, investors’ worries about fiscal plans from the administration are likely to persist. For the yen to make a strong rebound, more reassuring communications about fiscal policies will be necessary.
