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Kuroda Desperate To Guide USDJPY Lower

Over the past couple days, there has been speculation as to why Kuroda would make public statements regarding the weakness of the yen. Is he too naive to know that his comments will move the market? Doesn't he know that a weakening yen, i.e. rising USDJPY, is "good" for Japan?

Kuroda, and most central bank governors for that matter, are not stupid. However, some of them are desperate given that they have run out of policy tools to push markets around with. In Japan's case, what has happened is that the yen has weakened further and faster than the BOJ had planned. Officials' comments suggest that the BOJ wanted an orderly descent to about USDJPY 120, and then for it to remain around that figure. Instead, over the past few months it has blasted up to 125, at a pace which would see 130 before the end of the year even without the Greek drama reaching the only plausible conclusion (default and/or Grexit).

What Kuroda was doing are known as "open mouth operations" i.e. OMO, which in the past decades the BOJ would perform in the opposite direction. During the period of uncontrolled JPY strength killing exports, the BOJ would regularly give public speeches and media conferences to declare that the yen was too strong, they were closely monitoring the situation, and yen strength was unwarranted. In the past, OMO would have a 1-day effect (if any at all), after which the yen would continue to strengthen.

Once the geniuses on wall-street figure this out, USDJPY will likely return to the pre-OMO level of 125 and likely test 130. If Greece defaults and/or exits the common currency consortium, there will be huge gyrations in USDJPY, likely in both directions. Whereas in the past the JPY was considered a risk-off currency (buy it in times of trouble), Japan's worsening fiscal position and increasing debt load make it less clear now.

Ultimately, investors will look to the sovereign debt position of japan and should realize that they could be one of the next sovereigns to fail. If JGB yields continue to rise, everyone knows that it is impossible for japan to refi at higher rates, particularly given that they are the only net buyer of JGBs already. Given the newfound illiquidity in the JGB market, a gap-move could bring JGB yields to 2%, driving USDJPY towards 150 and NIKKEI towards 30,000.

Kuroda is actually a smart guy and has probably envisioned this and other possible scenarios, and he's doing what he can to prevent this outcome. Time will tell whether he succeeds, but the signs are not promising for him.