Japanese Yen Maintains Lows Despite BOJ Market Odds

How Did the Markets React? 

There was the typical mix of news out of Japan during the Asian session, as economic data indicated that businesses were performing well, consumers were feeling particularly pessimistic, and government officials expressed their desire for the Bank of Japan to keep rates on hold. First, lending by Japanese banks accelerated for the third consecutive month to 1.7 percent as corporate mergers and acquisitions, such as Japan Tobacco’s 2.25 trillion yen takeover over UK-based Gallaher Group, fueled credit expansion primarily amongst businesses. Later in the session, the Eco Watchers “man-in-the-street” survey highlighted dismal consumer confidence, boding ill for retailers during the holidays. Additionally, Japanese Chief Cabinet Secretary Shiozaki stated that he expects the BOJ to bear in mind the government’s view when the monetary policy committee meets next week. Mr. Shiozaki also said that the BOJ should assess the economy based on overall conditions, not just on a limited number of indicators. Japanese markets perceived the information in different ways, with JGB yields remaining relatively buoyant as overnight index swap rates show a 66 percent chance of a BOJ rate hike next week, up from 60 percent yesterday. Meanwhile, forex markets were a bit more skeptical, leaving yen to weaken for much of the night. Instead of trading on the data at hand, equities surged with the yen at one year lows as the export sector looked to benefit strongly from the currency’s movements.

Bonds – 10-Year Japanese Government Bonds

Yields on 10-year Japanese Government Bonds perked up to the 1.760 percent level at the market opening in response to the solid bank lending figures. However, rates slowly eased back amidst Chief Cabinet Secretary Shiozaki’s commentary and the disappointing results of the Eco Watchers survey, as tepid consumption and weak CPI should dissuade the Bank of Japan from tightening monetary policy next week. Nevertheless, yields on 10-year JGBs closed out the day a half basis point higher at 1.724 percent with prices down .034 to 99.796 as the markets are still pricing in a 66 percent chance of a hike.

FX – USD/JPY

USD/JPY maintained one-year highs between 120.30 – 120.70 in the Asian and early European sessions as the overwhelming bias amongst forex traders is that the Bank of Japan will opt to hold rates steady next week at 0.25 percent. The release of Japanese bank lending figures gave yen a brief boost, with USD/JPY dipping to 120.30, as the data signaled that the expansion of credit could help to fuel inflation in the economy. Price subsequently bounced to a high of 120.72, however, and maintained lofty levels as the Eco Watchers survey held steady at 48.9 – indicating that consumers are feeling broadly pessimistic - doing little to negate fears of stagnant spending, which is only slowing Japanese expansion. Chief Cabinet Secretary Shiozaki’s commentary also weighed heavily on the Japanese currency, but yen got an unexpected boost as the de facto currency for the yuan on rumors that the People’s Bank of China may be about to hike rates, which stemmed from another rumor that Chinese CPI data for December will be much hotter than estimates. The buzz regarding China will only be able to do so much for yen, as the potential of the Bank of Japan leaving rates unchanged next week, tepid economic data, and carry trade differentials greatly benefit USD/JPY bulls.

Equities – Nikkei 225 Index

Japanese stocks rose sharply on Friday, led by the export sector after the yen fell to its lowest level against the dollar in more than a year to 120.72. The Nikkei 225 was up 1.3 percent to 17,057.01 with the help of electrical machinery and auto shares, which both rose 2 percent. Matsushita Electric Industrial, the world’s biggest consumer electronics maker under the Panasonic brand, leapt 3.3 percent to 2,385 yen, while Sony, the consumer electronics and entertainment giant, jumped 2.4 percent to 5,560 yen. Toyota, Japan’s biggest automaker, climbed 2.1 percent to 7,820 yen.

The banking sector took the market’s odds of a 66 percent chance for a Bank of Japan hike next week to 0.50 percent to heart, as shares gained 2.5 percent. An increase in the benchmark by the central bank would allow individual banks to raise their own rates, effectively boosting lending margins. As a result, Mitsubishi UFJ, the world’s biggest bank by assets, advanced 2.7 percent to 1,510,000 yen.