It’s perhaps easiest to sum up the Japanese Ministry of Finance’s ‘modus operandi’ via the medium of a GIF, at this point:
75 Yards To Go Nowhere
The month from 28 April saw the MoF spend around $75bln USD in an attempt to prop up the value of the JPY.
The result? USD/JPY presently trading at 159.70, precisely where spot was at the start of the aforementioned accounting period; and, in fact, the trade-weighted JPY actually being marginally weaker than when those interventions first commenced in the aftermath of the April BoJ meeting.
You Can’t Have Your Cake & Eat It
It’s fairly obvious to understand why these interventions haven’t achieved especially much, at least at face value. Japan is, at present, attempting to run a relatively loose fiscal stance, combined with a relatively loose monetary policy, all while attempting to prevent too significant a weakening in the currency. One could, reasonably, describe this approach to policymaking as akin to ‘having your cake and eating it’.
Quite simply, those three factors are typically mutually exclusive, with softness in the currency acting akin to a pressure release valve for the easy fiscal and monetary approaches.
All this is to say that, by and large, any interventions conducted by the MoF are likely to resemble more of a ‘speed bump’ in the broader trend of JPY weakness, as opposed to marking a durable turning point in the direction of travel for the yen. In fact, it’s tough to even argue that the MoF have succeeded in stamping out the FX speculation that they detest so significantly, given that both realised and implied JPY vols have been subdued for some time now. Realistically, the only speculators involved here at the moment are the interns manning the Tokyo hotline to the BoJ’s trading desk!
The MoF’s 2 Options
There are, ultimately, two options for the MoF here, over the medium-term. Either, the fiscal authorities can lean on the BoJ to tighten policy faster (unlikely), or adopt a tighter fiscal approach (even more unlikely!). Alternatively, the MoF can continue to throw good money after bad in an attempt to defend the 160 figure in USD/JPY, which while having been drawn as a ‘line in the sand’ for now, can’t be defended indefinitely abesnt a shift in the underlying fundamental backdrop.
All this, then, to me, means that the risk/reward continues to tilt in favour of short JPY positions for the time being, with ‘Mr Market’ likely, in time, to free itself of the macroeconomically-incompatible shackles that the MoF is attempting to impose on it.
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