help me understand the boj’s considerations now

[pejak]

apologies if this is naive, im just a simple man trying to understand what is going on.

1usd currently buys 156 yen. this is because interest rates in japan are low, and the “risk free” us government bond rate is 5.25% vs the 0.1% that japan offers, so naturally more people would demand usd instead of jpy so they can enjoy the 5.25% risk free. the yen will continue to stay depressed unless there is a cut by the fed or a hike by boj.

the fed cant cuz cuz inflation will run, but they cant hike either cuz so many regional banks that offer loans to small businesses are insolvent at current i/r. the boj cant hike interest rates cuz where will the money to pay for interest payments come from? they already run a 6% budget deficit, so they would need to either raise taxes to pay for higher interest rates or print money, and we all know which one is more politically convenient (printing money).

so whats going on in Japan now, is the boj just stuck? what are the implications of this on business, investment, and everyday people? seems to me the everyday saver and most normal japanese with assets in japan are just gonna get fucked?

would appreciate any insight and please be patient in explaining this to me, im just trying to figure out whats going on

 

[lishacccc]

@pejak Why would the BOJ want a stronger yen? What's wrong with the current exchange rate from the BOJ perspective?

The BOJ's legal mandate is "price stability," which they've decided means a 2% CPI growth target.

March's YoY inflation was 2.7%. Inflation has been on a descending path for a while, so it's not obvious that they need another rate increase.

 

[jandolphrohnson]

@lishacccc

The BOJ's legal mandate is "price stability," which they've decided means a 2% CPI growth target.

If the result is that e.g. food prices are allowed to be extremely unstable then perhaps this is a poor choice of interpretation that should be reconsidered.

 

[christiangirl2017]

@lishacccc Could you break this down a little bit? What do you mean by a legal mandate? And what about the common sentiment of Japanese people who are sad they couldn't go to Hawaii for Golden Week?

 

[lishacccc]

@christiangirl2017 I mean, when governments create central banks, they give those central banks an explicit mission, by law. The US system has a dual mandate of full employment and stable low inflation. Since 1998, the BOJ has had a single mandate of price stability, given to it by the Diet by law.

Governments want to strike a delicate balance with central banking. They want a prosperous economy, and they also want to keep central banking a bit at arm's length so that the central bankers can do politically difficult and unpopular things (so that the democratic parts of the government don't have to).

The BOJ doesn't care about Tanaka-san's (or, alas, @lishacccc's) vacation plans. They are deliberately shielded by a bunch of layers of insulation so that they won't care about what you and I want day-to-day, and that's probably a good thing.

 

[christiangirl2017]

@lishacccc Wow thanks. Imo they were doing awesome with price stability. And so Daiso is dependent on the BOJ?

 

[seekingtoserve]

@lishacccc I think we’ll find it isn’t the lost vacations that bite but people realizing the yenjamins stashed in the post office are worth more than a third less than they were 18 months ago, and that value is dropping FAST

There’s an estimated $7 trillion sitting in Japanese banks as yen right now, and every week that number shrinks by a terrifying amount

 

[lishacccc]

@seekingtoserve Those yen are worth a third less when spent abroad. They're worth 2.7% less than they were a year ago when spent on the standard bundle of consumer goods in Japan.

 

[mellie]

@seekingtoserve That is an utterly meaningless statement. The value of yen savings in my other currency is largely irrelevant unless Japan’s savers could only spend in that other currency.

The core item is yen’s worth in Japan, and as noted, Japan inflation is low and falling.

 

[christalife]

@seekingtoserve

are worth more than a third less

Speak maths please

 

[sacredword]

@pejak 30 years ago, yen fell past 200.
Us govt requested the Japanese government to step in and restrict the range of its trade.
Just like the solution to high oil prices is high oil prices
The solution to weak yen is weak yen

There comes a point of diminishing returns when political risk and risk of rapid yen appreciation threatens the usdyen carry trade. The fear factor will augur a rapid yen appreciation. Historically this happens with yen past 200.
The 155 level is deemed as an inflection point which bothers us too.

It's not that the boj does not want to do more. But without fundamentals, any attempt to stem the bleed will only create a buying point after which the bleed continues.

The boj has chosen to benefit from buying us treasuries to boost its own treasuries instead of defending the yen, consistent with it's policy that makes it the largest buyer of us treasuries all along.

 

[adkp]

@sacredword

30 years ago, yen fell past 200.

The last time the USDJPY rate was 200 was 1986 which was nearly 40 years ago, not 30 years ago.

Us govt requested the Japanese government to step in and restrict the range of its trade.

That did not happen when the USDJPY was at 200, nor did it happen 30 years ago.

The USDJPY had been generally falling since 1971 when the US abandoned the gold standard and Bretton Woods ended. In December 1971 the Smithsonian Agreement was reached which set the USDJPY rate at 308 with about a +/- 7yen range.

Then in 1973 the yen was removed from its peg and allowed to float freely. After some fluctuation, the yen started to appreciate in value (USDJPY falling) until 1978, when it hit 179. After that it fluctuated quite a lot, moving as far as 277 in 1982, and then again to 262 in 1985.

In 1985 the Plaza Accord was reached which agreed the USD was overvalued and that the G5 (now G7) should work together to weaken it. After that the yen dropped like a rock, falling from 240 to 120 in just over 2 years.

Since then the USDJPY rate has spent most of its time in a band between 100 and 120, with occasional forays above and below that.

 

[sacredword]

@adkp I stand corrected. My history timelines are as fuzzy as my mind.
Thank you for the corrections!
Respect for the details too.
My opinion from the readings at that time was that 200 was the breaking point for the Plaza Accord to be formulated

 

[jandolphrohnson]

@pejak The BoJ will aim for a stable 2% inflation rate, like many central banks. Differences between countries are caused by underlying differences, a) growth in the real economy b) how much debt governments are taking on.

The cheaper the yen gets the better Japanese industries should perform. And the higher US interest rates the more their government's debt is growing. At the point where they reach a similar debt-to-GDP level to Japan you'll probably see interest rates come into line with each other and the exchange rate will stabilise, if not before.

 

[zeckycarter16]

@jandolphrohnson Except that cheap yen also has to buy expensive raw materials. So costs go up.

 

[jandolphrohnson]

@zeckycarter16 Well sure, but you'd hope a business is selling products for more than the cost of the materials. So they should come out ahead on net.

 

[seekingtoserve]

@jandolphrohnson Only if people are buying. Companies are going to tighten the belt like you wouldn’t believe if this continues

 

[baptistriune]

@jandolphrohnson They don’t though in Japan’s case. It’s an extremely complicated equation and depends on multiple variables unique to each country. For Japan, it’s estimated that the benefit of having cheaper goods to export isn’t generally matched or outweighed by the higher cost of importing everything, so a weaker yen within reason makes the country poorer.

 

[adkp]

@zeckycarter16 For exports the yen-denominated cost of imported energy and raw materials is inconsequential.

For domestic sales it means a bump in prices, but the weak JPY means Japanese labor costs are lower which helps Japanese companies compete better against products produced overseas.

 

[pejak]

@jandolphrohnson thank you. i suppose this just means that japanese companies that export goods will be more competitive and thus would be a decent trade