Is the Japanese yen facing a huge earthquake? "Gao Shi Trading" Drags the Bank of Japan, Will Friday See a Lightning Intervention After Verbal Stability in 2022?

The market generally expects the Bank of Japan to maintain its benchmark interest rate on Friday, which will not provide direct support for the yenif the yen falls, traders will be highly vigilant for the earliest possible forex intervention by the Japanese government on that day. All Japanese central bank observers surveyed by institutions predict that the Bank of Japan will keep the policy interest rate at 0.75% unchanged at the end of its two-day policy meeting on Friday. Earlier, the Bank of Japan raised the policy interest rate last month to its highest level since 1995. The focus of this meeting will be the extent to which Bank of Japan Governor Kuroda will give a hawkish signal as the yen approaches a key level against the US dollar. As of the time of drafting, the USD/JPY exchange rate was 158.20, not far from the 160 level. 160 is considered a rough dividing line for the Bank of Japan to intervene in the yen exchange rate multiple times in 2024. According to sources last week, Bank of Japan officials are paying more attention to the impact of the yen depreciation on inflation, as further depreciation of the yen may push up prices and accelerate future rate hikes. Naka Matsuzawa, chief strategist at Nomura Securities, said, "The Bank of Japan may hint that the threshold for the next rate hike will not be high to avoid exacerbating the yen depreciation. They may leave room for maneuver, potentially taking action as early as April." On the same day the committee makes policy decisions, Japanese Prime Minister Kawai Sanae will dissolve the lower house, paving the way for an early election on February 8. Market speculations suggest that she may lead the Liberal Democratic Party to a landslide victory in the election and announce that this will authorize the government to increase fiscal spending, putting pressure on the yen and government bonds, while also pushing up stock prices to historic highs. Since early October, the yen has fallen by about 7% against the US dollar, the largest decline among major currencies. At that time, Kawai Sanae, who advocates fiscal and monetary stimulus policies, became a top candidate for Japanese Prime Minister for the first time, and eventually successfully elected later that month. Although the Bank of Japan was the only major central bank to hike rates last year (and hiked twice), these measures failed to reverse the yen's weakness. Japan's interest rates are still second lowest among major economies, behind only Switzerland. Pricing in the overnight swap market shows that traders believe there is a 58% chance that the Bank of Japan will hike interest rates in April, higher than the around 38% predicted in December last year. Among the economists surveyed, July is the most popular time for a rate hike, while the freely floating yen is seen as an unknown factor that could accelerate the rate hike process. Akira Hoshino, head of Citi's Japan market, said in an interview that if the yen's weakness continues, the Bank of Japan may hike interest rates three times this year. Last week, Japanese Finance Minister Katsukitsu and senior officials from the Bank of Japan revealed that authorities are paying more attention to this matter and stepping up verbal warnings. The spotlight this week is likely to be on Kuroda's press conference. Traders will closely monitor whether the developments will be similar to those in September 2022. At that time, former Bank of Japan Governor Haruhiko Kuroda's comments after maintaining policy stability led to further weakness in the yen; less than an hour after the press conference ended, the Japanese Ministry of Finance made its first yen purchase since 1998. Tsuyoshi Ueno, chief economist at the NLI Institute, said, "I am closely watching whether there will be any hawkish tendencies or warnings related to the weakness of the yen." Kuroda needs to be careful. Ryutaro Kono, chief economist for Japan at BNP Paribas, said that given Kawai Sanae's support for monetary easing policies and the approaching election, Kuroda may not reveal information about accelerating the pace of rate hikes at this time. However, if he is too dovish, yen bears will seize the opportunity. Market data shows that investors' positions are relatively dispersed, which may limit the magnitude of market fluctuations. According to data from the US Commodity Futures Trading Commission, as of January 13, leveraged funds had net short positions of $8.1 billion in the yen, while asset management firms had net long positions of $2.4 billion. Washington will also closely monitor developments. US Treasury Secretary Scott Bennett said earlier this month that Japan should continue on the path of monetary policy normalization and emphasized the importance of "developing and communicating the rationale for monetary policy." He expressed similar views in October. In his first speech of the year, Kuroda hinted that he plans to continue raising interest rates, and he has ample reasons to do so. It is expected that the inflation data to be announced on Friday will show that Japanese consumer inflation has been above the Bank of Japan's 2% target for four consecutive years, providing strong evidence that inflation is picking up. The Bank of Japan will also update its quarterly economic growth forecasts this week. Sources revealed earlier this month that the authorities may raise their economic growth forecast due to the large-scale economic stimulus package pushed through by Kawai Sanae in December last year. Economists surveyed expect that the Bank of Japan will not make significant adjustments to its price expectations despite the recent yen depreciation putting upward pressure. The Bank may maintain its expectation of achieving the 2% price target in the latter half of the three-year forecast period ending in March 2028. In addition to the stimulus package, Kawai Sanae has compiled the largest annual budget for the 2026 fiscal year ever, with funds coming from inflation-driven revenue growth. Therefore, Kawai Sanae plans to reduce the government's debt-to-GDP ratio. Kawai Sanae plans to take another measure to suppress inflation by temporarily lowering the sales tax on food, as promised in her campaign platform. In response to this news, Japanese government bond yields soared on Monday, with the 5-year, 30-year, and 40-year Japanese government bond yields all hitting historic highs. In terms of the impact on economic data, Capital Economics said that this move may turn inflation negative. Former Bank of Japan official Sakura Masako believes that Kawai Sanae's fiscal measures are too expansionary for an economy already plagued by inflation, and are likely to push up living costs through exchange rate fluctuations. Daisuke Karakama, chief market economist at Mizuho Bank, said that the yen plays a crucial role in Japanese monetary policy decisions, and this has long been an open secret. However, the yen may once again play this role at a time when the government needs to defend the domestic exchange rate, causing "deep concern." Karakama said, "The ultimate choice boils down to one of two pains: higher interest rates or yen depreciation. Since one of these pains must be endured, the final decision may lie in the hands of politicians rather than the central bank."