At the end of February, shortly after Japan’s disastrous attempt to crush the Yen at the expense of a stronger dollar when the BOJ unveiled its first episode of Negative Interest Rates, only for everything to go spectacularly wrong for Kuroda, the world’s financial leaders met in Shanghai where the so-called Shanghai Accord took place when in no uncertain terms central bankers around the globe (and especially the Chinese) came down on Janet Yellen like a ton of bricks demanding that the Fed do a “dovish relent”, and stop the Fed’s monetary tightening talk, ease back on expectations of further rate hikes, and generally talk down the dollar.
This is precisely what happened. However, while China was delighted because the weaker dollar meant less FX intervention and less capital outflows from China, Europe and especially Japan were livid: after all the offset of a weaker USD would be a weaker EUR and JPY.
And, heading into this weekend’s closely watched G-7 meeting in Japan’s Sendai, the Bank of Japan had made it quite clear it was not happy with being repeatedly singled out by the US Treasury as happened just a few weeks ago, when Jack Lew singled out Japan by putting it on a new currency watch list with a warning not to devalue its currency unilaterally and without prior approval of the international committee.
To be sure, when the meeting started…
everyone was all smiles…
… with hopes they could hammer the deflation monster to death…
… or failing that, hammer out some agreement…
… but it was not meant to be.
Unlike February when all central bankers had one simple intention, to push the value of the dollar lower, this time the key issue was whether or not Japan could intervene to devalue the Yen at the first possible opportunity. And without any support to take on the US, whose position has been to only allow prepapproved (and thus greenlit by the US) central bank intervenions, Japan was left out in the cold.
To be sure, the G7 did release a joint statement, according to which the group of seven nations agreed not to target exchange rates, saying “excess volatility and disorderly movements” can have an adverse impact on economic and financial stability, however already here one could sense the tension express by Japan which explicitly said that the “summary statement does not officially represent G-7 consensus”, suggesting that now Japan is the G-7 black horse, desperate to push the Yen lower, however the US refuses.
Also, according to the statement, global uncertainties have increased, and as a result the G-7 reaffirmed existing exchange rate agreements, agreed to avoid competitive FX devaluation, adding that it is important to implement fiscal strategies flexibly. The G-7 also committed to reducing international cash transaction threshold hinting that the phasing out of cash in the Developed countries continues.
On the topic of monetary policy, the G-7 agreed it will continue to support economic activity and ensure price stability, in other words keep asset prices artificially inflated. It also said that terrorism, Brexit, refugees complicate economic environment.
But from a trading perspective, what was most important is what was left unsaid in the joint statement. It is here, where as Reuters reports, the United States issued a fresh warning to Japan against intervening in currency markets on Saturday, as the two countries’ differences over foreign exchange overshadowed a Group of 7 finance leaders’ gathering in the Asian nation.
As noted first above, Reuters also writes that “Japan and the United States are at logger-heads over currency policy with Washington saying Tokyo has no justification to intervene in the market to stem yen gains, given the currency’s moves remain “orderly”. The rift was on full show at the G7 finance leaders’ meeting in Sendai, northeastern Japan, with U.S. Treasury Secretary Jack Lew saying he did not consider current yen moves as “disorderly” after a bilateral meeting with his Japanese counterpart.”
The US Treasury secretary was adamant: in the aftermath of the NIRP fiasco, any BOJ interventions will have to be preapproved by the US: “It’s important that the G7 has an agreement not only to refrain from competitive devaluations, but to communicate so that we don’t surprise each other,” Lew told reporters on Saturday. “It’s a pretty high bar to have disorderly (currency) conditions.”
Hence, the US – and thus global – position is that only if the USDJPY is plunging by a few thousand pips in any given day does the BOJ have permission to intervene. For all other BOJ manipulation, the Federal Reserve will have to be consulted first. Translation: Kuroda (and by implication Abe) is now treated like a little child among the world’s financial elite, and he has lost the right to act independently. It also means that now the Fed believes China’s FX stability is far more important than that of Japan.
There was some obligatory spin by Japan to save face: after all it would be absolutely humiliating for the BOJ to be schooled on its own soil. Japanese Finance Minister Taro Aso said there was no “heated debate” on the yen with Lew, and that it was natural for countries to have differences in how they see exchange-rate moves. But the meeting with Lew did not stop him from issuing verbal warnings to markets against pushing up the yen too much.
“I told (Lew) that recent currency moves were one-sided and speculative,” Aso said in a news conference on Saturday, adding that the yen’s gains in the past few weeks have been disorderly.
The Japanese finmin was alone.
While Aso has publicly warned of intervention after the yen’s recent rise to 18-month highs, some economic policymakers have signaled that they are not too worried the yen will derail a fragile economic recovery.
Aso also said his G7 counterparts reaffirmed the importance of exchange-rate stability, Japan received no public endorsements from other G7 members for intervention to contain “one-sided” yen rises. “There is a consensus that monetary policy is well-adapted and there are no big discrepancies in currencies, so there is no need to intervene,” French Finance Minister Michel Sapin told reporters after the two-day G7 gathering concluded on Saturday.
Meanwhile, the biggest monetary hawk of all, Germany, made it clear that calls for aggressive, coordinated global fiscal policy just won’t happen.
G7 leaders called for a mix of monetary, fiscal and structural policies to boost demand but left it to each country to decide its own policy priorities – dashing Japan’s calls for more aggressive joint fiscal action.
Germany has shown no signs of responding to calls from Japan and the United States to boost fiscal spending.
Enter Germany’s finmin Schauble, who said that “the most important are structural reforms… there are more and more (in the G7) recognizing that structural reforms are crucial.”
The conclusion from this G-7 meeting, in as much as one is possible, is that the financial stress that was prevalent in February when global risk assets and commodities were tumbling and pressured the world’s financial leaders to hammer out an agreement, one which however is now self-defeating as the easing in financial conditions resulting from the Shanghai accord, is precisely what has caused the failure of a follow-up monetary agreement, not to mention Japan’s latest humiliation and demotion to rank below that of China, at the Sendai meeting.
Furthermore, should the Fed proceed with another rate hike in June or July as the market now seems to believe, it would mean more USD strength, more Chinese turmoiling, another sharp tightening of financial conditions, more tumbling asset prices and so on in deja vu fashion. But the good news for Japan is that at least it will have gotten its way and a weaker Yen, if only briefly, before this entire episode is repeated yet again.
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