Morning Brief – New Governor in town

Charles Porter
Tue 7 Mar 2023

New Governor in town

The Japanese Yen has attracted a lot of economic commentary over the past few months. The Yen had been losing significant ground on markets as the Bank of Japan clung to ultra-loose monetary policy. Even in an environment of rising global inflation, the central bank kept rates low and kept the monetary financing taps on. If you recall, the Bank of Japan not only held record low benchmark rates, but had also employed a relatively new tool of yield curve control. This ensured that virtually no corner of the fixed income market could produce rising yields and increase the cost of borrowing beyond the central bank’s intention. In the BoJ’s defence, inflationary pressures domestically were limited by global standards. 

Whilst double digit inflation was becoming commonplace in many developed markets, Japan’s inflation rate did not see such a sharp spike. Instead, a gradually rising price level has characterised economic conditions in Japan over the past year. The expectation had been that with a handover of governorship at the BoJ, policy adjustment might be in store and rates may finally be allowed to rise. This week will see the new Governor Ueda provide the latest monetary policy decision for his bank and country. The decision on Friday will test market’s conviction behind the need for monetary adjustment in Japan and their guess that the change of policy maker at the helm will herald in that change. 

There are some risks to this theory. Firstly, there is a lot of data in Japan due for release ahead of the decision. If that data, concerning high salience statistics including GDP and inflation itself, paints a picture of a residing inflationary pressure in Japan it may fuel a continuance of dovish monetary policy. Implied volatility across the entire FX market has been falling with lower realised volatilities. This calm (for now) may also limit the need to adjust policy for fear of further volatility and value losses within the Japanese Yen from the perspective of the central bank. Many analysts are also warning that the new Governor may wait until the next policy meeting in April before rocking the boat. However, any hint towards an adjustment in policy rates during his tenure could change the Yen’s course significantly. 

Discussion and Analysis by Charles Porter

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