THE YEN CONUNDRUM


As the end of H1 2024 approaches, some of the fog over this year’s much anticipated rate cuts in the developed world excluding Japan is lifting. However, the path higher in Japan, and the path lower in the USA still remain heavily shrouded, and second guessing the extent of the divergence between both of these, and those already embarked on rate cuts (SNB, Riksbank, ECB and Bank of Canada) will be the subject of much speculation in H2.


While the Fed remains ‘front and centre’, along with the increased focus on the US election as the year progresses, what happens in Japan still has the potential to send some shock waves. The US dollar remains the king of global currencies, even if many question how long it can sustain this role, particularly given the sharp rise in federal debt as a % of GDP (a rather narrow perspective), but Japan remains the world’s largest international creditor, even if its government debt to GDP ratio remains by far the largest in the developed world.


The BoJ’s meticulously stage-managed strategy to engineer an exit from negative rates and 10-yr Yield Curve Control (YCC) has to be applauded, gradually widening the YCC bands, and then finally exiting in March of this year, without creating the much feared disruptive capital flows (back to Japan) that many had feared.


Chart 1


Source: Bloomberg, Bank of Japan 16 | ADMISI - The Ghost In The Machine | Q2 Edition 2024


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