Tuesday night, during the Asian trading session, Bank of Japan Governor Kuroda made some remarks, which I found rather unusual.
Here is the actual quote:
Once an increase in the U.S. interest rate is priced into the market, the actual action won’t necessarily lead to a further rise of the dollar against the yen.
He then went on to further say:
Provided there isn’t a surprise other than the market factoring in a higher U. S. interest rate, a further gain in the dollar seems difficult.
He made these comments after the Friday payrolls number in the US had sent the yen down to a 13 year low against the dollar after the NFP announcement. It sure seems as if suddenly, Mr. Kuroda is singing from a different hymn book.
Remember, this is the same fellow who had been singing the praises of a weak yen, calling it beneficial for the overall Japanese economy. After all, if the goal is to generate inflation inside Japan, and to beat back the deflation boogeyman which has haunted that nation for more years now than I can remember, a weaker yen is a necessary part of the plan.
So what gives? I am wondering if Kuroda is getting worried that the yen has fallen so low that it is going to raise the cost for imported goods coming into Japan and actually hurt consumer spending. In other words, maybe the plan to push the yen lower is now having a counterproductive impact on the consumer in Japan and instead of spurring an inflationary bias might actually be working to crimp economic growth, especially since so much of the food and energy needs of the Japanese must be met from abroad.
In looking at the daily chart of the yen, above, Tuesday’s surge higher is no doubt the evidence of a giant number of shorts being flushed out by the surprising Kuroda remarks. No one, and I mean no one was expecting him to say something like that.
Whatever may have happened to cause him to change his tune, as a result, currency traders are having some second thoughts about leaning on this currency too hard. Now the guessing game will shift to “Does the BOJ actually want the yen to move higher or were they merely trying to put a floor underneath it?”
The reason so many shorts fled is because, at the moment, they do not know the answer to this question. Anyone who has traded currencies for any length of time knows full well that whatever the BOJ wants for the yen, ultimately it is GOING TO GET IT. I learned that lesson the hard way many years ago. If they say the yen is too cheap, they damn well mean it—and they will not hesitate to make certain that it moves accordingly.
We are going to have to watch the situation very closely as a result of these remarks. There are an awful lot of hedge funds on the short side of the yen trade. If they start coming out in size this thing could easily rally back up to the .8440 region.
We need to see if it can make it up to .8200 first. Given the interest rate differential situation in the US versus Japan, it is difficult for me personally to envision a scenario in which the yen suddenly reverses its trend lower against the dollar. However, this appears to be a long overdue correction and that is what it appears the BOJ desires for now. Apparently they do not want a rapid fall in the yen from these levels.