The Bank of Japan (BOJ) is reeling from Trump jawboning. With a visit to Washington scheduled for February 10th, the political ripples are spilling over into monetary policy projections for both nations. This can be read from the latest developments from open market operations by the BOJ (3 February).
Markets were caught unaware, with the limited buying of Japanese government bonds (JGB’s) by the BOJ and the 10-year rate spiked to 0.15%. Currently, the benchmark for JGB’s with a maturity of 10 years is set at zero %. This is part of the yield curve control mechanism and the broader very accommodative stance of monetary policy as implemented by the BOJ. Although it will never be acknowledged, the current monetary policy regime plays for a weak Yen to make exports more competitive.
The market is trading on expectations of ‘unlimited purchases’ by the BOJ to implement the policy and to ensure the yield curve straddles the 10-year bond at zero percent. Seeing that it lost the confidence of the markets, the BOJ reacted swiftly with an unscheduled open market operation by buying an unlimited amount of JGB’s in the market. This brought the market rate in line.
The impact was evident from movements in the Yen (see graph). At first, the Yen appreciated (on higher interest rates) but after the second unscheduled operation the Yen dived in reaction to ‘unlimited buying’. All of this has led to surging volumes, where those in forex that are interested in trading online have been able to find new opportunities when establishing a new stance in currencies.
Monetary Policy Changes
This is the conundrum facing not only Premier Shinzo Abe, but also the Governor of the BOJ Haruhiko Kuroda. The business lobby Keidanren put a Trump task force in place to respond to the risk of a vastly different playing field for business in response to trade pressure from President Trump. The points of discussion between Trump and Abe is a bilateral trade agreement and the automotive industry.
Whether Governor Kuroda received any instructions to limit the impact of intervention before this scheduled market operation will not be known. The markets however acted on the uncertainty and were pulled back with the second open markets operation – it seems like the tail wagged the dog at first.
But one word must spell huge risks for both Premier Abe as well as Governor Kuroda – currency manipulator. President Trump has already eyed China and he attacked Germany for making use of a ‘weak Euro’.
It is further evident that the tide in the international gilt market is moving against the zero percent target set by the BOJ. But the specter of currency manipulator will unsettle the monetary stance of the BOJ.