The Bank of Japan & Case for Yen Strength

September 20, 2023

Jason Gibbons

Since taking key interest rates negative in 2016, the Bank of Japan has remained ultra-accommodative, but recent data is likely finally shift the tides. Only recently, post Covid and JPY weakness, is Japan seeing core inflation move from its modestly positive run rate to spiking over 4% in recent months.  Against a backdrop of a growing Japanese economy, a push for growing real wages and a cheap Yen, has the BoJ finally telegraphing changes to policy.

Japan’s economy and focus on sectors such as semiconductors and tourism, have greatly benefited in a post Covid world. Moving from an average 0-1% inflation rate, the spike to over 4% has been fueled by imported inflation coupled with a weak Yen. Recent disappointing revisions to quarterly GDP (annualized 6% down to 4.8%) and lower consumer spending figures, tell only half the story. Consumers are flush with savings, approaching 10% of GDP, allowing the growth in spending power as was seen in the US (both in goods and services). Against the weaker Yen, foreign dominated sales in the semiconductor and healthcare industries have been a tailwind to growth. While importing a lion’s share of food (60%) and energy (95%), the recent rise in oil is likely to further propel inflation, which has already moved the BoJ’s and market inflation forecasts higher moderately higher.

The change of guard at the BoJ this year, as expected, has kept a rather dovish tone. Yield curve control measures allowing a controlled float higher in the 10 year JGB’s, while a welcomed move, was countered with yet a still weakening Yen (~-5%). BoJ FX intervention, which was last seen in Sept-Oct 2022, is a fairly probable course of action given recent weakness. The carry trade, while still profitable, will likely cover Yen shorts as interest rate differentials narrow.  

Labor markets have become so tight and real wage growth so low, the BoJ has taken a keen role in pushing wages forward. An end to negative interest rates is now in sight, with the BoJ hinting that they may be in a position to gauge real wage growth as a precursor to pare back accommodative policy.  Growing market expectations for a first rate hike in Q1 2024 coupled with rate pause/cuts in western central banks, will be a tailwind in JPY strength in the coming year.


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This material represents an assessment of the market and economic environment at a specificpoint in time. It is not intended to be a forecast of future events or a guarantee of future results.