JPY stays weak with Ueda failing to provide reason to buy

JPY: BoJ will have to hint at sooner hike to provide support

USD/JPY hit an intra-day high of 159.45 earlier today – the last time this level was hit was also an intra-day high back on 12^th July 2024, the last day that the MoF intervened to buy yen. The MoF had intervened on 11^th July (intra-day high 161.76) and again on 12^th totalling JPY 5.53 trillion that was enough to see the yen commence a move of sustained yen recovery that extended to an intra-day low of 141.70 on 5^th August. USD/JPY then briefly broke below the 140-level in September before reversing course and recouping nearly all of that strength by year-end. Intervention had helped prompt a notable drop in USD/JPY (other factors helped of course like the BoJ rate hike at the end of July and the market becoming more convinced on Fed rate cuts which materialised in September 2024) but it failed to stick and the move retraced sharply.

That example highlights the challenge the MoF will have on this occasion to have any success in strengthening the yen. This is especially so when we have the added political uncertainty under a new PM who more market participants believe may in fact privately welcome the yen remaining weak as part of a broader ‘reflationist’ economic policy stance. Investors are rightly asking whether ‘fiscal dominance’ is now becoming a bigger feature of Japan’s economic policy framework. This is when economic policy is geared toward managing debt servicing costs and overall debt at the expense of inflation remaining higher. As nominal GDP growth accelerates, it helps drive down debt-to-GDP. The 5-year average growth rate of nominal GDP in Japan is now 3.5% - the strongest growth rate since 1995.

That perception is being reinforced by the impression that the BoJ is onboard with such an economic policy strategy. Governor Ueda spoke today at an event hosted by the Regional Banks Association of Japan and merely repeated the usual guidance that the BoJ will “keep raising interest rates and adjust the degree of monetary easing” in line with improving economic conditions if the BoJ’s outlook materialises. With the BoJ seemingly indifferent to a weakening yen despite inflation at 3% and policy rates still deeply negative, the scope for successful intervention is minimal. A stronger mandate for PM Takaichi in an election (8^th Feb now cited as most likely) only reinforces the prospects of the current policy mix being maintained for longer. We suspect yen downside momentum will continue despite the building risk of intervention given the challenge of any intervention proving successful.

USD/JPY BACK AT LEVEL OF INTEVENTION IN JULY 2024 – 2024 INTERVENTION TOTALLED JPY 15.3TRN BUT SUCCESS WAS TEMPORARY

Source: Bloomberg, Macrobond & MUFG GMR

USD: Fed speakers signal steady policy

The CPI data released yesterday from the US was on the weaker side of expectations but ultimately had little impact on Fed rate policy expectations with the focus more on geopolitical risks and the possibility of the US taking military action against Iran. The CPI data certainly suggested once again that the tariff-related inflation impact could already be behind us which will help provide scope for more cuts if the labour market remains weak. It was certainly good enough data for President Trump again to call for rate cuts and repeat his accusation of Powell being “too late”.

The data revealed the annual rate for goods inflation is now running at 1.7% with the core goods rate at 1.4%. However, some of the more import-sensitive goods inflation did show a notable rebound in December (apparel, furnishings) after the sharp drop in November. The unreliability of the data due to missed data during the government shutdown likely means investors will not come to any final conclusions on the tariff-related inflation impact for another month or two.

Certainly Fed officials will hold off any conclusions at this stage. NY Fed President on Monday stated that the policy rate “is well positioned” to stabilise the jobs market and bring inflation back to target.  Yesterday, St. Louis Fed President Musalem appeared to endorse Williams’ comments by stating he saw “little reason for a near-term easing of policy” and that risks would have to materialise for him to justify moving. Musalem is not a voter on the FOMC this year but Anna Paulson and Neel Kashkari are and both will speak today and their interpretations of the labour market and CPI data will be telling in shaping near-term policy expectations. It seems highly likely that both will likely also endorse the message of policy being “well positioned” for now.

There have been questions posed to us in regard to the Trump subpoenas and specifically why did Trump decide on this action now with Powell departing in May anyway? There are two theories here. Firstly, this is just Trump wanting to send a broader message on wanting more control to try and influence the behaviour of all FOMC members going forward. Secondly, the Trump administration may have been concerned over the idea of Powell stepping down but staying on to serve his Board of Governors term that doesn’t end until 2028. That would leave Trump short one pick for the Board this year. Assuming Powell does step down and assuming Stephen Miran is replaced when Adriana Kugler’s term expires at the end of January and if Lisa Cook could be fired, those scenarios would leave Trump with the selection of three picks for the Board, including the Chair of course.

This is a ‘slow-burn’ negative for the US dollar that isn’t going away. It will surely be an incentive for global reserve managers to continue reducing their holdings of US dollars in reserves (see chart). We see the euro as well placed to take up more of this diversification than what we have seen so far

EUR RESERVE COMPOSITION JUMPED REFLECTING BOTH EUR FX MOVE AND UNDERLYING BUYING OF EUR

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com