BoJ meeting, Japanese elections and yen
With a Bank of Japan meeting on Tuesday and an election between parties to decide who will succeed Prime Minister Suga later this month, the yen may finally enjoy some volatility. The central bank is unlikely to disrupt the waters as the economy remains trapped in deflation, so the yen’s fortunes will primarily be decided by who wins the election and how global forces evolve.
The deflation blues
Don’t expect much from the Bank of Japan next week. Other central banks could move towards exiting aggressive money printing, but the BoJ won’t do so for a very long time. Much of this has to do with Japan’s fragile recovery and, of course, its decades-long battle against aging populations and saving habits.
Let’s explain ourselves. While most of the world has been grappling with an inflationary episode in recent times due to severe supply chain disruptions, Japan is still trapped in deflation. Consumption has also not been impressive despite massive stimulus packages, and the latest PMI surveys have collapsed, indicating slower growth ahead.
On the bright side, immunization levels have reached parity with America and Europe, even though Japan was late to the party.
This is the short term story. The big picture is that the economy simply cannot escape the curse of an aging population and very high savings rates. If your population is shrinking and people are saving a high percentage of their income, that is a terrible recipe for consumption and growth. Ultimately, that breeds deflation.
The BoJ remains silent
The central bank has tried all kinds of tricks to drive up inflation. He used negative interest rates, quantitative easing, yield curve control and even stock purchases. Yet even his own forecasts suggest that the inflation target will not be met over the next few years.
As a result, the BoJ will most likely be the last major central bank to exit cheap money policies. Investors know this very well, which is why the yen no longer reacts to economic data or BoJ meetings.
But an election could be another story. When Prime Minister Suga announced he would resign, Japanese stock markets immediately went into overheating, scenting more government spending to come.
The next date to watch is September 29. This is when the ruling party, the PLD, will hold its leadership elections. The winner will automatically become prime minister due to the party’s majority in parliament, but may not retain this throne for long as general elections will be held in the next two months.
The three favorites in the PLD elections are Taro Kono, Fumio Kishida and Sanae Takaichi. Kono is leading the way in opinion polls and is in favor of a spending program focused on increasing wages and growth. He has also urged the Bank of Japan in the past to come up with an exit strategy for cheap money, so that he can replace Governor Kuroda with someone less accommodating when his term expires in 2023.
Kishida has similar policies. He also favors higher spending, but has argued for restoring fiscal health in the past and also warned that the BoJ’s stimulus could not last forever. Finally, Takaichi is essentially a political descendant of ex-prime minister Shinzo Abe. It favors bold public spending and an ultra-expansionary monetary policy.
As for the yen, it could perform better under Kono’s leadership, given potential incentives for companies to raise wages and a more conservative BoJ governor going forward. On the other hand, the Takaichi could be bad news for the currency.
If one looks technically at the dollar / yen, immediate resistance to advances could be found near the 110.40 area.
On the downside, the first target for sellers would probably be the 109.05 area.