In today's Macro Notes we talk about the rising correlation between Gold & S&P 500, preview tomorrow's Core PCE number and discuss our outlook for the Yen.
Regarding the yen, I have to disagree. inflation is a political issue, not an economic or financial one. from everything I have read (albeit I am not on the ground there) it does not appear that there is a huge uproar over the fact that inflation has moved from 0% to 2%. the weaker yen is clearly impacting that, but remember, Japan is still largely a mercantilist country and a weaker exchange rate helps it greatly. Mr and Mrs Watanabe are long stocks and happy with the current situation. while I think the MOF is concerned about a sudden collapse, and we will hear a great deal of jawboning, if we grind to 155, my bet is they will not enter the market. Clearly anything can happen, but absent a yen crash, there is more pressure on China as the CNY strengthens relative to the yen, than on Japan in my view.
Intellectually I also would like to see it grind to 155. The Fed is on hold at 5.33% and even though the BOJ is hiking, its marginal. The overnight rate is still barely above zero. It's expensive to be long the Yen.
I hear you on the exporter glee with the weak yen:) and Mr Watanabe's stock portfolio.
My concern is that Japan is a still a large importer of foods and energy to feed its economy, so headline inflation could remain elevated if the Yen weakens. Maybe no one in Japan is too worried about that but I suppose I am a textbook macro-economist at heart and believe when a central bank says its going to target a certain inflation rate than they should do that rather then shifting the attention else where, in Japan's case to wage growth.
In fairness, for more than a decade, they targeted 2% inflation and never got within spitting distance. they have been there for 15 months now, hardly conclusive. clearly the wage settlement should help push things a bit higher, but again, you cannot take the politics out of it, at least not when trying to discern the way the market will behave. consider how big a deal inflation is here politically, which has been the clear driver of the Fed. now, I am of the belief that Powell basically told us that they were no longer going to target 2%, and that 3% will be acceptable, but I could be completely wrong. perhaps we will learn more tomorrow.
All I'm saying is that 40 years of experience in the FX markets tells me that there is no guarantee that they are going to act. Anyway, as you mention, if they don't change policy, it is all irrelevant except in the very short-term. so, absent the Fed cutting or the BOJ tightening a lot, it is hard for me to make the case. rather, a better argument for a strong yen is the Fed causes a serious dislocation in the US, either tightening further as inflation ticks higher, or just waiting long enough for the lag effects to start to matter. if US equities start to fall, dragging the entire asset class lower, then the Japanese will rush home and the yen will rally a lot (see October 1998) but absent that, perhaps short-term dips but that is all. at least in my view.
Regarding the yen, I have to disagree. inflation is a political issue, not an economic or financial one. from everything I have read (albeit I am not on the ground there) it does not appear that there is a huge uproar over the fact that inflation has moved from 0% to 2%. the weaker yen is clearly impacting that, but remember, Japan is still largely a mercantilist country and a weaker exchange rate helps it greatly. Mr and Mrs Watanabe are long stocks and happy with the current situation. while I think the MOF is concerned about a sudden collapse, and we will hear a great deal of jawboning, if we grind to 155, my bet is they will not enter the market. Clearly anything can happen, but absent a yen crash, there is more pressure on China as the CNY strengthens relative to the yen, than on Japan in my view.
Intellectually I also would like to see it grind to 155. The Fed is on hold at 5.33% and even though the BOJ is hiking, its marginal. The overnight rate is still barely above zero. It's expensive to be long the Yen.
I hear you on the exporter glee with the weak yen:) and Mr Watanabe's stock portfolio.
My concern is that Japan is a still a large importer of foods and energy to feed its economy, so headline inflation could remain elevated if the Yen weakens. Maybe no one in Japan is too worried about that but I suppose I am a textbook macro-economist at heart and believe when a central bank says its going to target a certain inflation rate than they should do that rather then shifting the attention else where, in Japan's case to wage growth.
Let us see.
In fairness, for more than a decade, they targeted 2% inflation and never got within spitting distance. they have been there for 15 months now, hardly conclusive. clearly the wage settlement should help push things a bit higher, but again, you cannot take the politics out of it, at least not when trying to discern the way the market will behave. consider how big a deal inflation is here politically, which has been the clear driver of the Fed. now, I am of the belief that Powell basically told us that they were no longer going to target 2%, and that 3% will be acceptable, but I could be completely wrong. perhaps we will learn more tomorrow.
All I'm saying is that 40 years of experience in the FX markets tells me that there is no guarantee that they are going to act. Anyway, as you mention, if they don't change policy, it is all irrelevant except in the very short-term. so, absent the Fed cutting or the BOJ tightening a lot, it is hard for me to make the case. rather, a better argument for a strong yen is the Fed causes a serious dislocation in the US, either tightening further as inflation ticks higher, or just waiting long enough for the lag effects to start to matter. if US equities start to fall, dragging the entire asset class lower, then the Japanese will rush home and the yen will rally a lot (see October 1998) but absent that, perhaps short-term dips but that is all. at least in my view.
PS, I really like your notes. thanks