​Yen’s rebound remains Sisyphean

The Japanese yen was on track for its best week against dollar on the prospect of narrowing US-Japan rate differential though remaining above the important 150 mark.

The BOJ signalled that negative interest rates could be ended at its latest policy meeting. More specifically, spring wage talks between business and unions will be key to the timing of an exit.

Nearly 60% of economists polled by think tank Japan Center for Economic Research after the policy tweak expect the BOJ to tighten policy in April, followed by 12% projecting a January move.

Warren Buffett’s Berkshire Hathaway plans to sell yen-denominated corporate bonds for the second time this year to take advantage of low rates which could be turned on its head later.

That being said, a widely anticipated wage-price spiral in the country is dubious as wholesale inflation in Oct cooled more expected with the biggest decline in 3.5 years.

Crack in economy

More challenges are underway on top of softening price pressure. Japan’s economy likely shrank over the summer as the impact of trade kicked in.

GDP is expected to shrink at an annualised pace of 0.4% in the third quarter, a dramatic U-turn from 4.8% growth in the second, according to economists.

That would mark the sixth quarterly contraction since spring 2022. The key factor is more likely to be a rebound in import costs partly due to a weakening yen.

Domestic consumption and capital outlay are seen to have been largely flat quarter on quarter. Consumers are feeling the pitch when real wages have declined for the 18th straight month in Oct.

However, Japan's trade deficit last month shrank 70% from a year earlier to 662.5 billion yen as imports continued to drop sharply and exports grew for the second straight month, government data showed.

Kazuma Kishikawa, economist at Daiwa Institute of Research, said “Japan's trade deficit is on the mend” going forward. That may offer relief to policymakers even if growth in the last quarter disappointed.

Japanese investors bought the most high-yielding US sovereign bonds in six months in September while selling most other sovereign debts, according to data released last week.

That has watered down expectations that Japanese funds will bring back their cash to the home market on signs of policy normalisation and thus weighs on the yen.

Rate-cut euphoria

Investors could become over-optimistic thinking that the Fed is done with tightening although consumer prices and private sector payrolls fuelled that sentiment.

Notably, the Atlanta Fed’s measure of “sticky” prices that don’t change as often as items such as gas, groceries and vehicle prices, showed inflation still climbing at a 4.9% yearly clip.

Hedge funds added to long positions for eight-straight weeks — the longest streak in over two years, according to CFTC. Some high-profile investors argue that the dollar’s bull run has the potential to extend.

T. Rowe Price expects growth in the US and higher interest rates versus other major economies to support the dollar and rate cuts next year are overblown.

Fidelity International sees those higher-for-longer US interest rates risking dragging the economy into a downturn that would benefit the greenback.

“We maintain our view of dollar resilience as we head into 2024, especially in the face of soft global growth and relatively firm US yields,” according to HSBC.

Other money managers cite ongoing geopolitical tensions, which will keep the dollar bid. But Bank of America are sceptical, warning that the US currency could be “vulnerable to a quick positioning reversal” from one of the most crowded trades.

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