The Feints of the Yen

The yen shot up on Monday, July 23. This comes after speculation that the Bank of Japan will advance an advance on a reversal of the stimulus measures next week. However, it won't get that far.

The yield on 10-year government bonds tripled in one fell swoop on Monday. That sounds spectacular, but in reality the interest rate jumped from 1% to 0,03%. The difference of 0,09 percentage points does mark the largest increase in almost 6 years.

Neither party took advantage of the offer to buy up (government) loans. Following reports of a potential change of course in the Bank of Japan's stimulative policies, investors are choosing to hold onto their bonds tightly and await the July 30 and 31 meetings.

Hope given up
Low interest rates indicate that traders have almost given up hope that inflation will pick up in Japan before 2030. Despite the reports of a less lenient policy, a change of course is not obvious. In a Bloomberg poll, all 44 economists surveyed indicated that the Bank of Japan will simply stick to its chosen course at the end of this month.

About 1 month ago, the bank painted a slightly weaker inflation picture than in the spring. Consumer prices are currently expected to increase by 0,5% to 1%, while the month of April was still reported to grow by 1%.

Pain in the export sector
Another reason why the Bank of Japan is sticking to the price is because otherwise the bank runs the risk that weak economic growth will take another blow. In the first quarter, Japanese GDP shrank by 0,2%. Due to the interest rate hike, the yen rose by more than 0,5% against the dollar and the euro. If there are actual signs that the stimulative policy is being phased out, the currency will make another jump.

This will erode the competitive position of the Japanese export sector, which is already struggling due to US President Donald Trump's trade war. This also explains why the Japanese stock market fell by nearly 1,5% after speculation about a change in the Bank of Japan's share price rose.

Fireworks
Despite recent reports, there is little chance that the meeting will produce fireworks. The most likely scenario is that a decision is made to investigate the effect of a long-term incentive policy. An actual change of course will only be discussed once inflation really starts to move. That makes the recent rally of the yen a feint rather than the initiation of a trend reversal.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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