Investors on alert after Japanese market jitters
Japan continued to preoccupy traders at the start of the week after the country’s prime minister suggested that the government was ready to support the yen, pushing the currency up to its strongest level against the dollar in two months following market turbulence that has been described as a “Liz Truss-lite moment”.
The yen marked its third consecutive rise against the greenback, climbing 0.8 per cent to finish the day at ¥153.8.
The moves came after PM Sanae Takaichi said on Sunday that her government was willing to take the “necessary steps” against speculative market moves, whether targeted at the yen or Japanese bonds.
Her comments added to the growing sense that authorities in both Japan and the US were preparing a coordinated intervention to prop up the yen if necessary.
“From what we understand so far, Japanese authorities may have intervened on Friday when USD/JPY pushed above ¥159 after the Bank of Japan policy meeting,” said Chris Turner, a foreign exchange analyst at ING.
“The big kicker, however, was widespread discussion that at the London close at 17:00 GMT on Friday, the Federal Reserve started asking banks in New York about their position sizes in USD/JPY. This was seen as akin to a ‘rate check’, where a central bank might be preparing the market for physical intervention.”
Interventions would include directly buying assets to effectively put a floor under the yen if it faced further selling pressure. Yields on Japanese bonds also moved lower on Monday having increased precipitously since November.
“The Bank of Japan were clear on Friday that they would step in if required to support the government bond market. This has calmed investor concerns for now and yields have fallen,” Hal Cook, senior investment analyst at Hargreaves Lansdown said.
However, the yen’s spike forced Japanese equities lower, with the Nikkei 225 losing 1.8 per cent.
“The yen is an important influence on Japanese shares because of the importance of exports to the Japanese economy,” Tom Stevenson, investment director at Fidelity International explained.
“A rising yen makes those exports less competitive, so it was unsurprising that the Nikkei 225, one of the world’s strongest markets last year, fell back at the start of the week.”
Why has Japan attracted attention?
The yen has faced considerable pressure over the past few months, largely due to fears about the new Prime Minister’s fiscal policies.
Takaichi became Japan’s first female prime minister in October and quickly unveiled an economic stimulus package worth $135.4bn, including major tax cuts to help alleviate living costs and reinvigorate Japan’s economy. The measures would be funded through a combination of extra borrowing and higher than expected tax revenue.
She then called a snap election last Monday, seeking a popular mandate for her policy package, while also announcing that she would suspend Japan’s consumption tax on food for two years – adding tens of billions to her already hefty fiscal package.
However, she did not give any details about how this extra measure would be funded, prompting jitters in financial markets, particularly given the size of Japan’s existing debt burden. Japan’s debt-to-GDP ratio hovers around 260 per cent, by far the largest of any major economy.
In response to the prospect of additional borrowing, yields on Japanese government bonds spiked last week, with the interest rate on the 10-year bond rising to its highest level since 1999, while the yen sank to a low of ¥159/$1 last Friday.
“Japan appears to have had a Liz Truss-lite moment,” Ken Griffin, the chief executive of Citatel, told an event at the World Economic Form event last week.
“This was one of the biggest moves in yields this century,” he said, adding: “Bond vigilantes are back.”
For now the market interventions have soothed nerves, but investors will be keeping a close eye on Japan until the election is held on 8 February. “Further volatility is expected,” Cook at Hargreaves Lansdown said.