It’s Time For The Bank Of Japan To Put Up Or Shut Up

Image: Steven-L-Johnson

After weeks of mostly ineffective jawboning by several of the country’s top economic policy makers, investors are wondering if the Bank of Japan is finally ready to make good.

While many remain skeptical about whether the BOJ would intervene by selling yen in the open market, expectations that the central bank might loosen monetary policy at a meeting next week — and effectively drive the yen lower— have risen in recent days.

The shift has helped propel the dollar to what looks to be its largest weekly gain USDJPY, -0.54% against the yen since January, with most of the rise coming on Friday amid reports the BOJ is weighing whether to extend negative interest rate loans to Japanese banks. Japanese officials have been speculated to be the source of some of the chatter among trading desks and in the press.

A massive earthquake that struck Japan’s southern island of Kyushu earlier this month raised expectations Prime Minister Shinzo Abe might authorize more infrastructure spending and other fiscal stimulus measures. Measures might have included postponing an expected consumption-tax increase, but possible tactics extended to monetary policy, too.

Steven Englander, global head of G-10 currency strategy at Citigroup, said one reason the yen rallied after the BOJ joined the negative interest rate club in January was because investors felt there was little more the bank could do without damaging the financial sector. By offering these new loans — which would be tantamount to paying banks to borrow money — the BOJ would show that it has more room to ease if necessary.

In Englander’s thinking, these latest reports suggest one of two scenarios will play out at the bank’s Friday meeting — remember, that’s just hours after the Federal Reserve wraps up a potentially dollar-moving interest-rate policy meeting of its own.

“One possibility is that the BoJ has a program ready and wants to be sure the measures will have the desired impact on markets, including both being read correctly and gauging the magnitude of the response,” Englander said.

“The other possibility is that they really would prefer to wait until mid-June and putting this on the radar screen will encourage investors to look past an April meeting with few concrete measures to the mother-of-all-stimulus to come in mid-June,” he added.

For its part, Bank of America’s global rates and currencies research team believes the BOJ will increase its purchases of exchange-traded funds either next week or at the June meeting.

Others, including Doug Borthwick, head of currency trading at Chapdelaine & Co., expect the central bank to increase its annual purchases of Japanese government bonds to ¥90 trillion, from the present rate of ¥80 trillion.

But even if the BOJ acts, betting on a long-term turnaround for the dollar might not be a good idea, analysts said.

Data from Japan’s Ministry of Finance shows that foreign demand for JGBs remains strong — suggesting that some large buyers, possibly central-bank reserve managers have retained a vigorous appetite, even as the 10-year yield has tumbled from 0.325% at the beginning of the year to minus 0.107% on Friday, according to data from Tradeweb.

The strategists at Bank of America also said JGB yields are too low to sustain a dollar rally.

Since August, the dollar-yen currency pair has moved erratically, logging a series of lower highs and lower lows.

“It’s not called the widow-maker for nothing,” Borthwick said, referring to the dollar-yen pair. “You can be right about the trend where it’s going, but you can have savage moves in either direction.”