[Tokyo, 24th]- Looking at the yen position in the IMM currency futures trading, which is often the focus of speculative movements in the foreign exchange market, as of January 17, 2023, it is a net sell of $ 2.24 billion. there is This is the smallest net short position since it turned net short ($4.51 billion) in the week of March 9, 2021.
The sharp rise in the dollar/yen exchange rate, the “largest yen depreciation in history” since the Plaza Accord, began in March 2022, averaging a net short of $7.72 billion during the month. If we look only at the amount of net shorts, the current amount has shrunk to about one-third compared to March 2022.
It may be said that speculators’ willingness to sell the yen has receded. However, the dollar/yen exchange rate is still hovering between 125 and 130 yen even if the willingness to sell the yen has weakened. Considering that the exchange rate was above 110 yen around this time last year, it can be said that the dollar/yen exchange rate is still swinging upwards of 20 yen against the yen despite speculators’ willingness to sell the yen receding. .
Ultimately, even if speculative yen-selling appetite weakens, as long as the trade balance, which is actual demand, is overwhelmingly over-selling the yen, I think there is a “bedrock” for the dollar/yen exchange rate to fall.
The fast-paced positions that appear in IMM currency futures trading are also likely to be highly influenced by interest rate conditions, especially the Federal Reserve’s monetary policy, which itself is a very important story.
However, that does not mean that the impact of the trade deficit can be ignored. At present, the situation seems to be a tug-of-war between speculative yen-buying and actual-demand yen-selling.
By the way, even though the net short position of the yen is shrinking, if we look at the gross position before netting out, it does not mean that the yen long position is increasing. You can see this by looking at the numbers.
For example, if we focus only on yen longs, the average for the period from March to October 2022 was 2.83 billion dollars, when the dollar and yen weakened markedly. Month-to-January 2023 average is almost unchanged at $2.74 billion.
From March 2022 onwards, the “two rapid expansions” of the domestic and foreign interest rate differentials and the rapid expansion of the trade deficit overlap, creating an environment where speculative yen selling is likely to occur, and in fact, it has created considerable profit opportunities. Haruhiko Kuroda, Governor of the Bank of Japan, has provided a tailwind for the exchange rate by sending out information that would support the yen’s depreciation.
In this regard, interest rate spreads between domestic and foreign markets are currently narrowing due to speculation about the FRB, and this is contributing to the unwinding of yen shorts by speculators.
However, the Fed’s policy management has nothing to do with closing the trade deficit. A quarter of Japan’s import value is determined by price trends in mineral fuels. Although the price of crude oil, a representative mineral fuel, peaked out in the middle of 2022, it is still about 30% higher (around 80 dollars) compared to 2019 when it was around 60 dollars per barrel. . At this rate, imports will not fall completely.
On the other hand, looking at exports, growth in exports to each country/region has clearly slowed down, and exports to China have turned to a year-on-year decline. Although the amount of imports is expected to decrease compared to 2022, it is assumed that the amount of exports will be sluggish this time. As a result, the trade deficit and yen selling of actual demand will remain.
Despite this situation, if there is a development in which speculators actively accumulate yen longs, it will be the case that the Bank of Japan’s new regime will take an aggressive tightening course after April this year. However, that would be a risk scenario.
In the first place, is it possible for the BOJ to proceed with normalization in an environment where there are strong expectations for a US interest rate cut in the second half of the year? Historically, the BOJ’s hawkish stance and the FRB’s dovish stance have a very strong impression of being difficult to coexist.
Try drawing a rough image. Suspension of interest rate hikes by the Fed and a slowdown in the US economy will likely become a hot topic after May of this year (the suspension of interest rate hikes itself may be earlier). Meanwhile, the Bank of Japan policy meetings are scheduled for April, June and July. If expectations for an interest rate cut by the Fed are likely to rise in the second half of the year, the BOJ will have no choice but to exploit the timing (April, June, July) in order to promote normalization.
That said, the risk of showing a hawkish stance at the beginning of the new regime is not small. The first meeting under the new system (April 27-28) will attract a great deal of attention not only from the market but also from the public, and preliminary observation reports will be overheated. There is a possibility that the image of the first meeting will follow for five years (in fact, the Kuroda regime did).
With the global economy slowing down this year, especially in Europe and the United States, it is likely that Japan’s performance will gradually weaken. This should not be attributed to the Bank of Japan’s monetary policy, but depending on how it behaves at the first meeting, there is a risk that it will be easy to point fingers at the “war criminals of the economic slump”. It seems that the Bank of Japan wants to avoid showing off its hawkish attitude.
Even if the price target in the joint statement by the government and the Bank of Japan is revised to a more abstract one, there will be no indication of the abandonment of yield curve control (YCC) or the cancellation of negative interest rates from the first meeting. I want to think
Of course, the situation will change completely depending on the decision of the new governor, but I think it is dangerous to expect the yen to be strong given the BOJ’s pivot (policy change) necessary for speculators to accumulate yen long.
Rather, I would like to see the impact after the yen short has been resolved and the position has become lighter (it becomes easier to increase the yen short again). For the time being, the Fed is expected to stick to a “slow” stance after it stops raising interest rates. Such a policy stance could lead to higher stock prices and lower volatility in financial markets.
Since the FF interest rate remains high, the gap in policy interest rates will remain. become fragile.
The 2006-2007 era, when the yen was said to be in a bubble, was a similar environment. Looking back at that time, Japan was also running a huge trade surplus, so the yen was depreciating with the fear that “actual demand would eventually bring the yen back to appreciation” (actually, after 2007, the strong yen appreciated. ).
On the other hand, Japan now has a huge trade deficit. Wouldn’t it be easier to imagine a situation where speculative positions would continue to lose their yen shorts, and instead of going net long, the shorts would expand again?
Of course, if the Fed decides to cut interest rates early, this assumption will be overturned, but I think that possibility is still low. I would like to discuss this point on another occasion.
Editing: Kazuhiko Tamaki
(This column isReuters Forex ForumIt was published in (Based on the author’s personal opinion)
* Daisuke Karakama is Chief Market Economist at Mizuho Bank. After graduating from Keio University Faculty of Economics in 2004, entered the Japan External Trade Organization (JETRO). From 2006, he was seconded to the Japan Center for Economic Research, and from 2007 to the European Commission’s Directorate General for Economic and Financial Affairs (Belgium). From October 2008, Mizuho Corporate Bank (now Mizuho Bank). When he was seconded to the European Commission, he was the only Japanese economist involved in preparing the EU economic outlook. His publications include “European Risks: Japaneseization, Yenization, Bank of Japan” (Toyo Keizai, July 2014), “ECB European Central Bank: From Organization, Strategy to Banking Supervision” (Toyo Keizai, November 2017) Moon). He has appeared in many media such as newspapers and TV.
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