Via Kit Juckes at SocGen:
Friday evening in South Korea and the talk of currency wars is pretty loud in the bars round here. The BOJ has cut rates on balances held at the central bank to -0.1%, creating a three-tiered rate system that’s left economists scratching their heads. The yen fell by 1.8%, a sizeable move but not a huge one. And they did it while I was having lunch in Seoul, after sending an FX weekly in which I gave the thought of such a move no thought at all.
First of all, forget the details, feed on the symbolism. Germany, Switzerland and Japan, the three great current account powers of the post Bretton Woods era, whose surpluses have financed the frivolity of baby-boomer Anglo-Saxons, are being told in no uncertain terms to stop saving. Whether it works or not matters less than the fact the disinflationary forces in the global economy are so entrenched that these central banks feel the need to set off on this path at all, following a trail of crumbs as they head for the gingerbread house.
I didn’t expect any move from Japan because I could see neither the motive nor the benefit of acting. Now I’ll watch and see if I was right or wrong.
“Abenomics” has used yen depreciation to raise inflation expectations, kick start an equity rally and help buy time for structural reforms to revive an under-performing corporate sector. But three years in, the yen remains by far the cheapest of the major currencies on any sensible valuation metric. Does trying to send it any lower make any difference? Is it even possible? That’s why I expected the BOJ to shrug off the recent (relatively modest) currency gains, and the Nikkei’s weakness. So far, so wrong.
Will negative rates dissuade an ageing population with inadequate pension and healthcare cover from saving?er… No. Will negative rates encourage investors to shift out of bank accounts and into higher-earning assets? Perhaps, but this is asking them to do what they already do. The yen already weakens in risk-on markets and only rallies when a scary world encourages capital repatriation. Does the housewife who recently got stopped out of a short yen, long Brazilian real trade really need negative rates to lend more money to Rousseff and co? Of course not! She needs something to give her confidence in Brazil, not another reason not to keep her cash at home.
If this is the right way of thinking about the yen,it will now settle into a (doubtless choppy) range, before strengthening when the next global shock turns up. USD/JPY will trade in a 116-124 range and fail to make new highs. EUR/JPY, AUD/JPY et al will bounce as shorts are squeezed out, and the Nikkei will rally. But not too far and then we’ll settle down. More concern about secular stagnation and systemic disinflation will frighten baby-boomers into saving even more for retirement, but the yen won’t weaken if Sony, Toyota and co don’t grab that third arrow before the archer collapses under the strain of keeping the currency this cheap, it will all be in vain.