- Bob Michel of JPMorgan Asset Management told CNBC that if the dollar-yen depreciates beyond 150 yen to the dollar, the Bank of Japan could tighten policy sooner than the market expects.
- The normalization of Japanese government bond yields could trigger the repatriation of Japanese capital held in overseas assets for a decade.
If the Japanese yen depreciates beyond 150 yen to the dollar, the Bank of Japan may raise interest rates sooner than expected.
Rising interest rates could then unwind the yen carry trade, allowing Japanese funds to return to the domestic bond market and causing market volatility.
While major central banks have been aggressively raising interest rates to combat soaring inflation, the Bank of Japan has been an outlier. Even as other global central banks have tightened policy over the past 12 months, Japan’s decades of accommodative monetary policy have resulted in a concentrated carry trade in the Japanese yen.
A carry trade involves borrowing money at a lower interest rate in order to invest in other assets that promise higher returns.
After hitting a 10-month low on Thursday at 148.47 yen to the dollar, the Japanese yen fell by about 0.4% against the dollar on Friday after the Bank of Japan left its negative interest rate unchanged. The price was around 148.16 yen.
Japan’s currency is under fresh pressure after the U.S. Federal Reserve held interest rate hikes unchanged on Wednesday and said it expects one more hike before the end of the year. The yen has depreciated more than 11% against the dollar since the beginning of the year.
“I think what they could be forced to do is look at the dollar-yen. We’re getting very close to 150…If it starts to get above 150, they have to take a step back and think. “The yen is falling.” It’s starting to cause more inflation than we probably want,” Bob Michel, global head of fixed income at JPMorgan Asset Management, told CNBC on Thursday before the rate decision.
The weaker yen makes Japan’s exports cheaper, but also makes imports more expensive, given that most major economies are struggling to contain persistently high inflation.
“Therefore, it may provide cover for them to start raising rates sooner than the market expects,” Michele added.
On September 22, 2022, the electronic market board shows the yen exchange rate at foreign exchange intermediaries in Tokyo as 1 dollar = 145 yen.
Stra | AFP | Getty Images
In July, the Bank of Japan, in its first policy change since Governor Kazuo Ueda took office, relaxed its yield curve control, which expands the allowable range for 10-year government bond yields from the target of 0% to 1%, plus or minus 0.5 percentage points. . April.
Yield curve control, or YCC, is a policy tool by which central banks target interest rates and buy and sell bonds as necessary to achieve that target.
Economists are watching for further changes to the Bank of Japan’s yield curve control policy. The move is part of Japan’s central bank’s efforts to reinvigorate growth in the world’s third-largest economy and sustainably reach its 2% inflation target after years of deflation.
Expectations for an early exit from the Bank of Japan’s ultra-easy monetary policy increased due to the following reasons: Ueda told the Yomiuri Shimbun. In an interview published on September 9, the Bank of Japan said it could have enough data by the end of this year to decide when to lift negative interest rates.
The report prompted many economists to bring forward their expectations for policy tightening to sometime in the first half of 2024.
Even though core inflation has exceeded the Bank of Japan’s 2% target for 17 consecutive months, central bank officials are cautious about leaving ultra-easy policy.
This is due to the lack of sustainable inflation stemming from meaningful wage increases, which the Bank of Japan believes will lead to positive knock-on effects that support household consumption and economic growth.
However, there are inherent risks when the Bank of Japan ultimately decides to raise interest rates.
“Japan has been the home of the carry trade for decades, and so much capital has been raised at very low costs in Japan and exported to overseas markets,” Michele said.
With the 10-year government bond yield hitting a 10-year high of about 0.745% on Thursday, Japanese investors are trading positions in various asset classes in various overseas markets that have offered better returns in the past. It’s starting to resolve.
“I’m concerned that repatriation could last a decade or more as the yield curve normalizes and interest rates rise,” he added. “He’s one of the risks I’m concerned about.”