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Japan's finance minister stresses importance of stability as super-dove Kuroda gets another term at helm of BOJ
The reappointment of super-dove Haruhiko Koruda to head the Bank of Japan for another term, and remarks by Japan's finance minister on the importance of exchange-rate stability on Friday, has analysts wondering if the moves were coordinated in an effort to squelch the strength of the yen.
Prime Minister Shinzo Abe's announcement Friday that he would leave Kuroda in the driver's seat at the central bank for another five-year term could be part of "a response to calm the market and arrest the rapid decline in the dollar-yen pair," said Boris Schlossberg , managing director of FX strategy at BK Asset Management.
After all, Kuroda has been a key architect of the monetary policy portion of the prime minister's "Abenomics" approach--characterized by ultralow interest rates, quantitative easing and tight control of the Japanese bond yield curve--which should lead to a weaker currency.
The yen , however, continues to rally. On Friday, the dollar-yen pair hit a new 15-months low of Yen105.55 . One dollar last bought Yen106.08 , down from Yen106.12 late Thursday in New York .
A strong yen is concerning because it could derail Japan's export-driven economic expansion, which is currently still in its longest growth stretch in 28 years (http://www.marketwatch.com/story/japans-economy-posts-decades-best-growth-streak-2018-02-13). But growth slowed in 0.5% in the fourth quarter of 2017, down from 2.2% in the third quarter, a potentially concerning drop-off.
The currency's ascent also led finance minister Taro Aso to stress the importance of exchange-rate stability (http://www.marketwatch.com/story/nikkei-rises-as-kuroda-renominated-to-lead-bank-of-japan-2018-02-15) on Friday, adding that action, presumably intervention, could be taken if necessary.
"So far, the news [of Kuroda's reappointment] had little impact on the market but could be just the type of catalyst needed for a small short-covering rally in the pair, which remains grossly oversold," Schlossberg said.
Global capital flows are meanwhile propping the yen up versus its rivals, said RBC's chief currency strategist Adam Cole , representing a counterweight to the central bank's long-running loose monetary policy stance.
Japan's finance ministry's capital flows data "show Japanese investors were large net sellers of overseas bonds for the second consecutive week in the week to last Friday," amounting to Yen1 trillion , said Cole. "This suggests that recent yen strength is not an entirely speculative phenomenon," he said. "Positioning does not yet appear to be a constraint of dollar-yen going lower still."
At the same time, the yen's new strength has been more subdued on a trade-weighted average basis, offering an explanation why there haven't been stronger words from the Bank of Japan yet, Schlossberg said.
Currency jawboning has been an important topic this year after U.S. Treasury Secretary Steven Mnuchin said that a weak dollar would benefit trade (http://www.marketwatch.com/story/these-are-the-2-biggest-reasons-for-a-weaker-us-dollar-2018-01-30). Even though Mnuchin later walked the comments back, saying that the U.S. had not departed from its longstanding strong dollar policy, the comments were implicitly criticized by European Central Bank boss Mario Draghi (http://www.marketwatch.com/story/its-trumps-dollar-policy-but-draghis-problem-2018-01-25).
Traders had expected the yen to strengthen this year (http://www.marketwatch.com/story/heres-whats-threatening-the-dollar-in-2018-2017-12-01), on expectations the Bank of Japan might move to conclude its quantitative easing program.
But Abe's appointments of Masayoshi Amamiya and Masazumi Wakatabe as Kuroda's deputies, the former being a key Kuroda ally and the latter a dovish academic, underline the continuity of Japan's loose monetary policy.
"Still, nearly half of a Bloomberg survey expect the BOJ to tighten policy late this year," said analysts from Brown Brothers Harriman .
Read:A mixed bag of economic data has been a downer for the U.S. dollar (http://www.marketwatch.com/story/heres-why-the-us-dollar-is-nobodys-valentine-2018-02-14)
Also read: Here's how a spendthrift U.S. could deal a blow to emerging markets (http://www.marketwatch.com/story/heres-how-a-spendthrift-us-could-deal-a-blow-to-emerging-markets-2018-02-15)
(http://www.marketwatch.com/story/heres-how-a-spendthrift-us-could-deal-a-blow-to-emerging-markets-2018-02-15)