The BoJ , The Yen & Central Banking Chess

Part 1: by Macro D

What is the favourite question of young Thomas, an intern in the exchange room at Skymars Bank [1], in these first days of May 2024?

"But who will lose out if a currency war breaks out today?"

And what does the Managing Director of the Global Macro Foreign Exchange of Skymars Bank say?

“The first chicken to lower interest rates”.

Let's start from the end. The Yen's exchange rate against the Dollar reached a high of 160, the highest in 34 years. At that point, the BOJ intervened and spent a fortune in the space of two hours, giving the impression that the much-respected Yen had taken the trouble to move like a top.

There was a bit of tension, but then the question arose spontaneously in all the trading rooms on the planet.

Will the FED ever turn its back on Japan?

Nobody thinks the FED will do it; after all, the swap lines in favour of Tokyo are always ready to take flight.

Let's move towards the Rising Sun. In Japan, the public debt is at 250%, but no one seems to fear disaster at 2-1-1 Nihonbashi-Hongokucho, Chuo-ku, in Tokyo.

Source": Dall-E

The Yen enjoys haven status, and despite hitting rock bottom, the Japanese currency still enjoys an accommodative monetary policy, an uninterrupted program of purchasing sovereign bonds, and seemingly no concern about colossal debt.

Kazuo Ueda, the BOJ Governor, said, "If a weak yen pushes up inflation and at the same time causes companies to significantly increase wages, then the central bank will do its part by raising rates more decisively".

I take this statement at face value and deduce that Ueda has no intention/need to raise interest rates again (after the first increase in March) at the moment. In the meantime, the markets are looking with amazement/fright at the collapse of the Yen and cannot understand what historical phase this collapse is in.

In the beginning, in the maturity phase, or in decline?

Let's proceed in order.