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Mix-Ansicht- Greed & Fear: The Politics of the Yen - leibovitz, 17.12.2001, 09:15
Greed & Fear: The Politics of the Yen
Greed & Fear: The Politics of the Yen
Greed & Fear:
By Christopher Wood
If the Fed’s move was the most important indictor of the week, the second was Japan's Tankan survey. This may have come out a little better than expected. Still, the deflationary spiral continues in Japan and with it more stories in the international press about growing pressure on the Bank of Japan (BoJ) to buy foreign currency bonds, in particular US Treasury bonds. The yen may turn out to be one of the big stories of 2002. Certainly, one of the key drivers for the value of the Japanese currency is expectations about policy changes in Tokyo or the lack of them. GREED & fear continues to believe that a watershed decision by the BoJ to buy foreign currency bonds has not yet been reached. But a check with Tokyo-based sources makes it clear that the pressure is growing. GREED & fear hears that there is now a consensus amongst Japanese politicians that a weaker yen is the most effective way of combating an accelerating deflationary cycle. However, the reality is that for such a policy to have any chance of being at all effective, the Japanese currency needs to be nearer 160 than 130.
ABN AMRO’s Japan economist, Vincent Musumeci, also points out another reason why elements within the Japanese power structure are pushing for a weaker yen. It would also help protect the banking sector from otherwise imminent nationalisation. A weaker yen would have a two-fold impact on Japan's banks. Firstly, it would provide support to the equity market, which is currently languishing dangerously close to the crucial 1000 level on the Topix index, as externally leveraged sectors would be boosted. Secondly, by weakening the yen in the lead up to the fiscal year-end any trading profits from US treasuries would be boosted in yen value, adding a kicker to the banks' profit and loss accounts at the book closing on 31 March. In fact, the second point could be already evident. The latest current account surplus data for October was larger than expected due to the higher level of income repatriation due to the weaker yen.
Traditionally, Washington has been dead against using a weaker yen to bail Japan out of its structural problems. But as the Japanese problems build, in the continuing absence of any clear evidence of reform action from Prime Minister Koizumi, there seems to be growing recognition that a weaker yen is inevitable. If this is to be the case it might as well be achieved via the BoJ buying US Treasury bonds which would also have the clear benefit of propelling down long-term US interest rates. This is the goal of both the Fed and the US government. The Federal Reserve will clearly not have been happy to see the surge in long bond yields in recent weeks. In this respect, the Japanese institutional investors remain a key player at the margin in the American government bond market. Thus, they bought a net Y5trn-worth of foreign bonds, presumably mostly US Treasuries, in the final spike of the bond rally in October and have turned net sellers in November in a falling bond market.
The issue then is, what is delaying the BoJ from adopting this policy. The answer is not, on this occasion, the by-now legendary reluctance of the Japanese central bank to adopt unorthodox measures. Rather, it is a turf battle between the BoJ and the Ministry of Finance (MoF), but one which is defined in legalistic terms. For under Japanese law, intervention in the foreign exchange market is the responsibility of the MoF. Until now, the BoJ buying of US government bonds has only been as directed by the MoF as a foreign exchange intervention tool, not as an instrument of would-be monetisation. The MoF is still reluctant for the central bank to adopt this role. It also fears the presumed negative effects of a weaker yen on the rest of Asia. GREED & fear says"presumed" deliberately because it is not clear that a weaker yen is quite the fundamental negative market sentiment in Asia still strongly believes it to be.
That Japan’s finance ministry still fears the alarm-inducing potential of a rapidly deprecating yen is clear from the supportive comments on the currency made this week by its officialdom when the currency briefly fell through 126. There is another point to consider. If the BoJ did start buying US Treasury bonds as an official policy, that could also lead Japan’s private sector, be it banks or corporates, to do the same. That would lead to a self-fulfilling decline in the yen and collapse in Japanese bond prices. For this reason, any official decision, which means one approved by the MoF, for the BoJ to start buying foreign government bonds will most likely commence only on an incremental basis. That said, it looks increasingly likely that such a decision may occur at least by the end of the first quarter of next year.
Author: Christopher Wood
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