The Bank of Japan is “on the tightest of tightropes above the pit of alligators”

As the dust settles from the Bank of Japan USD/JPY is rising above 141.00 and I think that’s the right trade. A week ago, I warned not to chase USD/JPY as it rose to 141.73 and we got a retracement all the way to 138.06 on a series of leaks and a messy trade. It certainly wasn’t easy but at the time I wrote:

I think the trade for the BOJ is to wait and see what they deliver and
if it’s yet-another kicking of the can on YCC, then buy USD/JPY with
both hands and dare the MoF to defend 145.00.

We didn’t exactly get a kicking of the can but that’s still the strategy. Whether YCC is 0.50% or 1.00% it’s still far lower than anything you’re getting in US 10s and every other developed economy. Yes, that spread has narrowed and that counts for something but at the same time, US rates are moving up on a strong economy so net-net it’s USD/JPY bullish.

Even more compelling is that now some of the headline risk is gone. The games the BOJ played were pure amateur hour and I can’t see any sense in the leaks and most-everything else Ueda has said in the past two weeks.

I spoke to Reuters today and offered some colourful language:

“This may be the first step towards a credibility crisis for the Bank of
Japan and that is really dangerous. They’re on the tightest of
tightropes above the pit of alligators. This is the first wobble, and
the Bank of Japan cannot afford to lose any of its credibility. I think
that’s the big reason why we still see so much volatility.”

What I’m talking about there is the monstrous amount of government debt in Japan and the further mountain of debt priced on it. The whole thing is held together by the assumption of low inflation and BOJ credibility.

That’s an enormous responsibility that the BOJ is dealing with. Maybe they somehow survive this round of global inflation but when Ueda says that risks remain towards too-low inflation, I shake my head. Too-low inflation isn’t perfect but it’s hardly an existential crisis. Meanwhile, if Japanese inflation went to UK-like rates, it would be catastrophic and the pain would reverberate through the financial system globally. I don’t understand why they want to take that kind of risk but — fine — perhaps Japanese consumers continue to defy the laws of economics. But even if you think that risk is minimal you can’t be sitting at the BOJ and leaking stuff all over the place then delivering some kind of convoluted decision that pretends a 0.50% cap that now extends to 1.00% hasn’t changed.