Do Governor Fukui’s G7 Comments Indicate a BOJ Rate Hike?

by: Eugene Chiguchi

Given the latest comments from Bank of Japan's governor Fukui and FinMin Omi in the G7 meeting, I believe that, assuming that we will have stronger GDP growth figures on Feb 15th, they will raise the rate in the next policy meeting on Feb 20th.

The impressive remarks from Governer Fukui on Feb 10th were as follows:

“I would explain the bank would like to take relevant action in monetary policy making, with stronger consideration about more contribution to stabilisation in world economic growth."

My understanding is that they intend to raise rates for stabilizing the forex rate and it will be preemptive action for potential threat in the future. A weaker yen [JPY] goes on and, in light of official comments from the G7, its swing back creates strong concern in the capital markets' view of unwinding JPY carry trades. The group unveiled their concern over hedge fund behavior in their communique. It is obvious that the group shared probability of turmoil from any leveraged transactions, i.e. JPY carry trades, as they see one-way appreciation in some specific assets with massive liquidity.

We all know the liquidity is generated by the BOJ easing policy, and the policy is not on equal footing with other major central bankers. In December and January, the BOJ had to concede under domestic political pressure, but now the bank could utilize the international commitment for policymaking. Under the latest G7 accord, the bank is expected to work pro-actively. It will be the final chance to have fundamental reasoning as we have stronger GDP figures on Feb 15th.

With fundamental proof, the bank could carry out the action. Fortunately or unfortunately, capital markets cannot discount the BOJ action as in previous months. It is not bad to bet on steeper JGB curve and more exposure on mega bank stocks with the outcome on 15th.

If the JPY drops off from the current trading range, i.e. JPY122.00 against USD, or JPY158.70 against EUR, then we will see more risk appetite for Japanese exporters, beneficiaries from weaker JPY move. Although markets discounted peak-out of profit growth momentum in some export sectors, JPY new low must work as another positive driving force. It has more impact than peak-out in profit growth momentum.