Intervention on the string?, The Japanese yen has broken below the psychological level of 148 against the US dollar, and the Bank of Japan continues to raise the "pigeon"

There is no doubt that in today's latest interest rate resolution, the Bank of Japan kept the benchmark interest rate unchanged at -0.1%, kept the 10-year treasury bond bond yield target near 0%, and maintained its forward-looking guidance unchanged, in line with market expectations.

However, the Bank of Japan's dovish stance does not fully meet market expectations. Earlier, Bank of Japan Governor Kazuo Shibata stated in his first independent interview since taking office that if the Bank of Japan has confidence in sustained price and wage increases, ending negative interest rates is one of the feasible options. This stance has been interpreted by the market as a hawkish stance. But today, the Bank of Japan stated that inflation expectations are showing signs of accelerating, and the Japanese economy is gradually recovering. It will continue to patiently implement loose policies to achieve price targets and accompany wage growth; Despite rising prices, consumption is still growing moderately; The year-on-year increase in consumer price index may slow down, core CPI may slow down, prices and the economy face extremely high uncertainty, and cost growth caused by import prices will slow down.

At the same time, the Bank of Japan has clearly stated the need to pay attention to exchange rate trends and the impact of exchange rates on prices. Regarding the possibility of ending negative interest rates by the end of the year mentioned in a previous interview with Kazuo Uchida, some analysts interviewed by First Financial have stated that part of the reason for this statement is to alleviate the pressure of yen depreciation. Ishida and Takeshi are more concerned about the impact of monetary policy on exchange rates than their predecessor, Hihiko Kuroda. But paradoxically, the Bank of Japan's dovish stance today has actually further suppressed the yen. After the interest rate resolution, the US dollar rose over 40 points against the Japanese yen in the short term, rising above 148.00. On Thursday, due to the Federal Reserve's September interest rate decision releasing hawkish information that it will continue to raise interest rates, the US Japan interest rate spread continued to widen, and the Japanese yen has already hit the psychological barrier of 148 against the US dollar, reaching its lowest level in over 10 months. Meanwhile, the implied overnight volatility of the US dollar against the Japanese yen has risen to its highest level since July 28th, when the Bank of Japan unexpectedly adjusted its yield curve control policy.

Dilemma

This expression of concern for exchange rate trends, but with interest rate resolutions once again putting pressure on the Japanese yen, may precisely reflect the Bank of Japan's increasing monetary policy dilemma at this stage. On the one hand, the Bank of Japan still hopes to maintain lower policy interest rates to stimulate domestic demand and achieve sustainable inflation based on domestic demand and wage growth. On the other hand, the sustained weakness of the Japanese yen caused by the continued low interest rates raised by the Federal Reserve will instead drive up domestic inflation and erode consumer purchasing power. This, in turn, forces the Bank of Japan to become an "eagle" to control the input inflation pressure driven by rising import commodity prices.

Hurt, Chief Investment Officer of Allianz Global Multi Asset Investment, told First Financial reporters that Japan's macroeconomic environment is full of challenges for the Bank of Japan. The CPI data has stabilized at a high level, with a CPI of 4.3% in August, and the market generally expects inflation to slow down. Meanwhile, salary data is even more complex. Despite the highly anticipated annual salary negotiations in Japan, which aimed to secure a cash income increase of up to 3.58%, the overall average monthly cash income growth rate in August slowed down to 1.3% year-on-year, with an actual year-on-year decrease of 2.5%. Therefore, it is still uncertain whether a benign price wage spiral has formed.

Regarding the Japanese yen, Hutt said that the Bank of Japan seems to be increasingly concerned about the second round of negative effects brought about by the excessive weakness of the yen. From a political perspective, the depreciation of the Japanese yen is becoming increasingly unpopular, but the Bank of Japan has limited policy tools. Hutt holds a moderate and constructive view on the current level of the Japanese yen. Decades of low exchange rates, coupled with market expectations of key interest rates from major central banks around the world peaking, have created appreciation potential for the Japanese yen. However, the spread factor remains extremely negative.

The yield of Japan's benchmark 10-year treasury bond bonds remained near a 10-year high of 0.745% before today's interest rate resolution. After the resolution was issued, it fell slightly to 0.734%. In the United States, after the Federal Reserve released another "hawk" on Thursday, the 10-year US Treasury yield climbed again, breaking through 4.5% for the first time since 2007. The US Japan interest rate spread continued to widen.

When to intervene

At present, the market is most concerned about when the Japanese authorities will intervene in the yen. Many market participants believe that the 150 mark will be the trigger point for Japan's intervention measures. John Will, Chief Global Strategist at Nikko Asset Management, said that the Japanese Ministry of Finance is likely to intervene on a large scale at the 150 level because it will find it difficult to tolerate more input inflation pressure.

The statements of Japanese officials are also constantly escalating. Japanese Deputy Finance Minister Makoto Kanda stated on Wednesday that Japanese officials are ready to intervene in the currency market at any time with the support of the United States. Japanese Chief Cabinet Secretary Hiroyoshi Matsuno previously stated that there are no options to prevent excessive foreign exchange fluctuations. On Thursday, US Treasury Secretary Yellen also gave the green light to Japan's intervention in the currency market, stating that "if Japan intervenes in the yen to stabilize exchange rate fluctuations, not to affect exchange rate levels, then this behavior is understandable.".