Thoughts and commentary heading into June Bank of Japan
Policy is already “out” via media - scale down JGB buying, potentially into “QT” territory, but structurally unable to make decisive JGB buying changes on paper. JPY to remain flat or weaken.
Heading into June Bank of Japan policy meeting
In case you missed my Substack Note that I wrote an hour before June FOMC (Wednesday 1PM EST)
God dammit Nikkei..😒
Alright 🇯🇵BOJ policy just front-ran 🇺🇸FOMC:
“The central bank currently aims for monthly purchases of around ¥6tn, has informed the market of plans to purchase between ¥4.8tn ~ ¥7tn of bonds per month.”
So current estimates are for ~¥70tn in JGB roll off (redemptions) for FY24, meaning if they take the monthly buying amount below ~¥5.7tn/month (which is more or less where the current is, so it will be less), then net-net, that technically puts BOJ in “QT” territory.
JGB futures taking a tick down. JPY doesn’t seem to give a F - at the moment, but that’s because Fed is about to do whatever they’re going to with their stupid ±1 dot plot. So all of this is now going to be mixed into the FOMC/Powell market reaction on FX & on yields - so beware of that - there is no more “clean read” on Fed market reaction anymore thanks to Nikkei/BOJ.
So much for “no more BOJ press leaks” that lasted a whole month - and a month of announcing nothing anyway.
🇯🇵Market confidence 👍
https://asia.nikkei.com/Economy/Bank-of-Japan/BOJ-to-weigh-cuts-to-government-bond-purchases
Let’s just double check to make sure that this is indeed an “official” policy meeting press leak coming from BOJ via their “public communications arm” Nikkei, which still boasts a 100% perfect track record in “policy leak accuracy” - and the way to tell if this is from BOJ is if the article authors are “Nikkei Staff Writers” - and, if Nikkei has “LEARNED” something. Based on pattern, it’s BOJ communicating only if “Nikkei has learned” something - otherwise it’s just Nikkei (the news) publishing nonsense/speculating.
So, let’s see… did Nikkei “learn…” in this article?
Yes, apparently “Nikkei has learned” - so this is BOJ talking.
So, there you have it - your June 2024 Bank of Japan policy announcement - a continued reduction of JGB purchases going forward. If you thinking “it’s not that simple you idiot” - actually, based on recent history with of Nikkei’s pre-announcements having a 100% accurate track record, AND capturing 100% of BOJ policy changes in Governor Ueda’s tenure- yeah, it is that simple, until shown otherwise.
Now, just because this is what the communication will be, it doesn’t mean that this particular measure can be decisively translated into policy - or for the markets to have anything solidly empirical to price in some new reality.
How would they communicate this into policy language?
How would we know that BOJ is actually going to taper their JGB purchasing amount in succession going forward, given that JGB regular buying operations are preannounced via a schedule that outlines an approximate range in buying quantity that is released on a month-to-month basis, with the exact details of each JGB buying operation determined and revealed on the day of - all of which is dependent upon and subject to current market conditions?
And what about the still/always-on-the-table JGB fixed-rate operations - where BOJ steps in with a hard red line in the sand and goes to battle defending JGB downside by offering to buy an unlimited amount of JGBs completely at their discretion - at any time (or any yield level) for any reason they wish?
How can BOJ know, or even plan for how many JGBs they will be buying going forward, if there is an “unlimited bid” option out there?
Or, are they now pre-committing to be market agnostic and unconditional in tapering their JGB buying amounts? Does a “buying reduction” policy therefore actually mean the abolishment of fixed-rate operations altogether?
Under the existing framework, methods and procedure of how BOJ actually operates in markets, there actually isn’t a way for BOJ to implement JGB buy-tapering effective immediately.
Here is the current JGB buying schedule, which we are still in the midst of.
The next revision doesn’t come until June 28th. But even if they re-published an entirely new schedule mid-month for June effective immediately, as I mentioned - this structure and existing JGB buying protocol in and of itself is one that is designed to be flexible day-by-day. So even if they scrapped the existing schedule and re-wrote it with far lower purchase sizes, it will require a degree of blind faith by markers that BOJ will unconditionally adhere to those lesser amounts of JGB buying. If markets do give the benefit of doubt to BOJ, and somewhere down the line, JGB yields go on a non stop surge, requiring BOJ to violate this “tapering” and buying more than expected (let alone if they ever conduct a fixed rate op bidding for the quantity of unlimited) - they’ve forever lost their ability to pull policy forward.
Also, by adjusting JGB purchases to a lower amount, BOJ is giving up some degree of the policy flexibly and ambiguity (YCC-C, Yield Curve Control-Control, as I’ve been calling it) that they’ve worked so hard and paid so much to reclaim back from markets. And similarly, they will have a much harder time in re-regaining flexibility and optionality back from markets down the line.
Either way- short of an unprecedented type of announcement and communication method and policy execution structure, let alone a shockingly significant reduction in JGB purchases, the Nikkei leak translated to an actual policy statement would only amount to hollow ink on paper - as there is no “effective immediately” implementation for markets.
That said - I suppose this extremely empty and stripped down policy statement from last meeting may have set the stage to allow for writing in whatever the hell they want:
Still, this is what markets (by which I mean JPY) looks like with the expectation of some form of cuts to JGB purchases. If they somehow deliver on this, and aside from the knee jerk algo move, this likely won’t help JPY strengthen. And if for some insanely stupid reason they do NOT deliver on this, after press leaking not just to Nikkei but everywhere (though Nikkei is all that matters, disgusting as it is), as well as spelled out in recent board member speeches, then JPY 160 handle comes back into the picture.
And what is the purpose of this “reducing JGB buying” - by signaling intention, if not in practice? Is it for continuing on this very nascent path to “normalization?” Is it JPY motivated? Is it JGB market functioning restoration related?
It’s in part for JGB market functioning and a lack of supply (as per the 1-3Y JGB buying op that went unfulfilled, as well as the strong 2Y JGB auction that turned global yields downward), but really - it’s all about JPY.
Quite a ballsy move to front-run the FOMC like they did. And I don’t blame them, if this was for currency risk management, and it seems very clear that was the purpose.
JPY Front and Center (Even If Left Unspoken)
For Japan policy officials, both at BOJ and obviously MOF, the yen is what matters at this moment. More than JGB yields in the Immediate-term, or the longer term.
The morning of June FOMC upon the soft US CPI release, USDJPY fell sharply (for once) - and not as a flash crash.
A welcome move for Tokyo. However - with FOMC dot plots and Powell-san coming up, this was no time to be complacent.
With Friday’s BOJ policy meeting still a full day and a half away, any yen-strengthening attempt by messaging a “cut to JGB purchases going forward” in policy may be too little too late if USDJPY upside momentum gets triggered- and a dot-plot rearranging FOMC is certainly a potential catalyst to do just that.
It was only one BOJ meeting ago when markets showed just how fast and far JPY can get crushed: from 155 pre-April BOJ → 160 the following trading day (before being yentervened upon).
Spot USDJPY levels were (are) currently setting up into the same exact levels heading into the last BOJ.
If FOMC (or anything else) triggered another vicious, 1-2 day, +5 figure rally in USDJPY akin to the last one that forced a yentervention, and USDJPY was at 160 by Friday heading into BOJ, then that would make for a very different policy meeting setup (and outcome) than if USDJPY were still in the mid-150s.
And even though the yen is right back to its previous pre-BOJ meeting levels, this is indeed a very different policy meeting setup than that of the April meeting - mainly because of one major differentiating factor: yentervention.
Heading into the previous meeting, official yentervention had not yet been executed. My view - this was the reason and explanation for Governor Ueda to be so strangely apathetic about JPY in rapid meltdown at the April BOJ press conference - as he likely had received private communication by Finance Minister Suzuki of an imminent yentervention locked and loaded (if necessary) - so Ueda need not / must not be too hawkish on already surging JGB yields for the sake of currency support. MOF will take care of JPY, you, Ueda, mind the JGB market. And so he did - and JPY got crushed in the hour that he spent in front of reporters, and further crushed thereafter into the weekend.
On Monday during Asia hours, USDJPY surges to 160, and sure enough, we get the first round of yentervention for the week, with more to come. By the end of the week, nearly ¥10 trillion had been spent in yenterventions - the most on record, and only a month (or less) to show for it before USDJPY’s bounce back came.
(By the way - a reminder: one of the USD-blasting yenterventions from the first week of May occurred moments after Fed Chair Powell’s press conference had ended at 5AM Tokyo time - so Japanese officials clearly don’t give a damn about front-running, or sneaking in after an FOMC meeting.)
So, here we sit at USDJPY 156 - 157 heading into BOJ once again. But the major difference - the yentervention loaded gun isn’t available as it was last time. CAN there be another yentervention should USDJPY surge on / after BOJ (or any time in the near future)? Sure, of course. But the hesitancy for MOF to yentervene is currently at peak levels - which is saying something, considering MOF had really dragged their feet for their latest inevitable yentervention. And while the last round of yenterventions didn’t fail, it also didn’t work. Meaning, it worked in that USDJPY was prevented from a a rapid runaway momentum spiral through 160, 165, 170… but it did not work in that the self-perpetuating JPY short cover momentum was not ignited as it was from the October 2022 yentervention.
And as I have been saying - the absolute worst case scenario, and biggest risk for MOF/Japan is for a failed yentervention to occur - in which USDJPY gets momentarily blasted down, but then recovers easily in short order, putting its ineffectiveness on display. Once markets collectively observe and realize that yentervention’s diminishing returns have depleted, then JPY will be destroyed. From the MOF’s perspective, the risk of a failed yentervention if far worse than a slow death JPY - that sentiment still very much exists at the ministry.
So, it’s BOJ’s turn to do something about JPY. The problem (among many) is - Governor Ueda. To be completely frank, and with all due respect to Governor Ueda (or, no due respect whatsoever) - after observing enough to get a good sense of the individual, Governor Ueda is very bad at market jawboning. Extremely bad. Not only ineffective, but actually exasperates the undesirable market moves when in the press limelight (and for what its worth, its because Ueda is generally a decent man and a bad liar - he just isn’t cut out for this job). This is not just my own opinion - it’s just very clear to all that he is a shaky, mumbling, zero-substance messenger.``
So if USDJPY was already at 160, ready to break out again heading into BOJ / Governor Ueda’s press conference, who the hell knows how many additional big figures higher USDJPY would be coming out of Ueda’s press conference.
I also think that Ueda has personal values that adhere to protocol and minding jurisdiction- i.e. he truly does not want to be seen as minding the currency, even more than minding the currency.
Here is an excerpt from BOJ Policy Board Member Adachi’s Speech on May 29, 2024:
“If a central bank frequently changes its monetary policy to stabilize a foreign exchange rate that is as highly volatile as recently observed, swings in interest rates are expected to become larger. Should fluctuations in interest rates become too large, it will be difficult to project future interest rates, thereby hindering fund raising for households' housing investment and firms' fixed investment. If fund raising by firms and households becomes difficult, this inevitably has a negative impact on economic activity. I therefore believe that, if responses to short-term fluctuations in the foreign exchange rate are made by means of monetary policy, price stability will be adversely affected.”
I believe Ueda subscribes to this thinking, or any other justification to not mind currency. And again, he is therefore unable to straight faced go against his core inner values or beliefs in public. Hooray for him - but honestly, your job isn’t to “be a good man,” it’s to execute by any means necessary - Mario Draghi “whatever it takes” refers to the conduct of bankers themselves as well.
So Ueda, get comfortable deceiving and lying to the public, for the sake of Japan. Everyone assumes central bankers are slimy liars anyway. Step up and “do your job.”
This is why I believe they did their Nikkei leak a day earlier than usual (normally comes out middle of the night on the day of), and front running FOMC. Nikkei, who has zero issue with lying or deceiving or saying and spinning anything, can effectively move markets far more than Ueda can (and in the desired direction).
They all know this, and that’s why they acted accordingly.
Ignore price action until after Ueda’s horrible press conference - but let’s see what happens.
(NOTE: I have decided to experiment with using these Substack “Notes” to convey quick, real-time or time-sensitive live market commentary, as those do not go out via email to everybody - which has been a split down the middle for Across The Spread member preferences. So, for those who do want thoughts on shorter term market developments that I feel are worthy of mentioning, please either set your notifications for my Substack Notes via the app settings, or proactively check your Substack app or site - so that the rest of you who don’t want to be bothered and inbox-clogged will not be. If however there is an immediate-term market development of widespread significance - like my previous Heads up: Potential JPY Surge In Immediate or Imminent Yentervention Possible, or even this Nikkei/BOJ policy leak front-running FOMC at the top - I will send out as a normal publishing, which I hypocritically did not do for the latter this time.)
Weston
I think a new Chat thread would be better than a Note. Chat threads send a notification and can be set on/off per subscription.
I believe that been pre-approved by the FED and/or Janet Yellen , given that Japan is an occupied vassal state (as we are, in Europe)
By the way - a reminder: one of the USD-blasting yenterventions from the first week of May occurred moments after Fed Chair Powell’s press conference had ended at 5AM Tokyo time - so Japanese officials clearly don’t give a damn about front-running, or sneaking in after an FOMC meeting