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Deutsche Bank Believe Today’s JPY Move is Warranted

JAPAN
  • Deutsche Bank think today’s JPY move is warranted and that this finally marks the day where the market realizes that Japan is following a policy of benign neglect for its currency. DB have long argued that FX intervention is not credible and the toning down of verbal jawboning from the finance minister overnight is on balance a positive from a credibility perspective.
  • The possibility of intervention can't be ruled out if the market turns disorderly, but it is also notable that Governor Ueda played down the importance of the yen earlier today. DB would frame the ongoing yen collapse around the following points:
    • Yen weakness is not that bad for Japan. Growth is fine and the government is helping offset some of the import costs via subsidies and core inflation is not accelerating. Most importantly, the Japanese are huge foreign asset owners via Japan's positive net international investment position.
    • There simply isn't an inflation problem. Japan's core CPI is around 2% and has been decelerating in recent months.
    • Negative real rates are great. There is a huge attraction to running negative real rates for the consolidated government balance sheet.
  • The bottom line is that for the JPY to turn stronger the Japanese need to unwind their carry trade. But for this to make sense the Bank of Japan needs to engineer an expedited hiking cycle similar to the post-COVID experiences of other central banks.
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