When the Bank of Japan (BoJ) announced its latest statement on monetary policy in conjunction with the Japanese government, the yen (FXY) strengthened counter to the trend over the past several months. It was very easy to explain this response as "sell the news" or disappointment with the 2014 start for open-ended asset purchases which will not achieve the 2% inflation target by next year (see "Introduction of the 'Price Stability Target' and the 'Open-Ended Asset Purchasing Method'").
Through 2014, the forecasts for inflation and GDP growth are indeed quite modest. From the statement (the shading shows the distribution of the forecasts and the circles show the median of the forecasts):
Forecast Distribution Chart of Policy Board Members for Japan's Real GDP
Forecast Distribution Chart of Policy Board Members for Japan's CPI (All Items Less Fresh Food)
Source: Bank of Japan, 'Introduction of the 'Price Stability Target' and the 'Open-Ended Asset Purchasing Method'
The reaction was swift with the yen strengthening against the U.S. dollar with its largest one-day move in eight months. Fast forward a week and USD/JPY has printed another 52-week and now 2 1/2 year high.
The trend of a weakening yen has followed a very orderly ascent defined now by the 20-day moving average (DMA)
For reference, the yen saw sudden strength in mid-January when Akira Amari, the Japanese economic and fiscal policy minister, stated that 89 is a "fairly good level" and triple digits would be excessive for USD/JPY. The market missed the point that this statement implies an acceptable range as high as 99 or so. Soon afterward, Carlos Ghosn, the CEO of Renault-Nissan, claimed that the yen is still too strong and should trade at 100 versus the U.S. dollar even as his company strives to make itself more independent of the exchange rate. A week later, Deputy Economy Minister Yasutoshi Nishimura indicated that a 100 level "wouldn't be a concern."
Similarly, the market may have missed the point in the BoJ announcements and forecasts that they leave the door open for even more aggressive steps to get inflation to 2% by next year. This is a particularly intriguing possibility if the Japanese government gets impatient with the trajectory and progress with inflation. The cooperation between fiscal and monetary authorities on the path to unlimited money printing should become a powerful combination for dumping increasing amounts of yen on the planet. I do not think that things are necessarily set in stone for the next two years as far as policy goes.
The international reaction to Japan's road to inflation has of course been greeted with displeasure in key corners of the world. For example, Jens Weidmann, head of Germany's Bundesbank, decried the pressure the Japanese government is placing on the BoJ to essentially participate in competitive devaluation. The American Automotive Policy Council, representing U.S. automakers on trade policy issues, urged "…the Obama Administration to make it clear to Japan that such policies are unacceptable and will be met by reciprocal measures." On Friday (January 25th), the Bank of Korea's Governor Kim Choong-soo seemed to suggest that South Korea's monetary policy would actively move against the appreciation of the won if the Bank of Japan succeeds in further weakening the yen.
All the belly-aching over the past week pushed Amari to step up and (somewhat indirectly) defend Japan's monetary policy:
'You might think there's a deliberate policy to drive down the value of the yen but we in government refrain from commenting on the exchange rate of the yen.'…the government and the BOJ had agreed on exceptional measures because Japan had to break a prolonged cycle of deflation and economic contraction.
These echoes of currency wars will likely get bigger visibility in the next G20 meeting. The world has become accustomed to the steady strengthening bias in the yen for so many years; the reverse is proving more and more unsettling.
Be careful out there!