2026 has started in economic terms at quite a pace. Today’s adventure can be looked at via something I have followed for several decades now. It involves which is sometimes called the Great British Peso and here is what I posted on social media yesterday morning,
A new multi-year high for the UK Pound £ versus the Japanese Yen this morning as it rises above 212 Yen.#GBPJPY
Back in Covid times the UK Pound £ had weakened to around 125 and it’s rally has been something I have followed and recall for example interest around 145.More recently a friend travelled there when we went over 200 and relatively she got a good deal. But there have been further rises as I pointed out on social media around 20 minutes ago.
The multi-year highs for the UK Pound £ versus the Japanese Yen continue as it rises above 214 this morning. #GBP
In fact we are now around the sort of level that it was at when I worked in Tokyo in the early 1990s, so there is a personal link. But whilst this is strength for the UK Pound £ the main move here is a weaker Japanese Yen and we can look at it another way. I recall it being considered significant when it went through 160 Yen to the Euro and this morning it is at 185.
Let me now take you back to the 30th of June 2023 when I asked if China and Japan were the new currency devaluers? We already have an answer for Japan but there is a nuance if we look at this from back then.
The yen fell about 0.2 per cent to ¥145.07 a dollar in morning trading in Asia, crossing the ¥145 level for the first time since mid-November and close to the ¥145.8 level that prompted Japan’s finance ministry to intervene last September.
The Yen has fallen against the US Dollar this morning to 159 and we are now in the intervention zone. This usually starts with Ministry of Finance officials indulging in some open mouth operations like we saw on November 12th.
Japan’s finance minister issued a warning regarding currency movements as the yen weakened toward the key psychological threshold of 155 to the US dollar ( Bloomberg)
But there is a subplot because the US Dollar is the most significant currency partly due to its influence on inflation as commodity prices are set using it. The weaker US Dollar masks the size of the fall somewhat.
The Bank of Japan calculates an effective or trade weighted exchange-rate and it was over 100 in 2020. It is behind the times ( November) and must be of the order of 70 now with the move picking up pace from the spring of last year.
Gold and Silver
If we switch to an issue popular in the comments section imagine what the rise in the price of precious metals looks like in Japanese Yen?! According to the website Goldprice we have Gold at 729,014.44 Yen per ounce and Silver at 13,592.57 Yen per ounce. The Silver price has gone parabolic being up 186% on a year ago.
So well played if you have been long either of these in Yen. But we have an even stronger devaluation theme here if you now look for new buyers in Yen terms.
Stock Market Surges
There was quite a surge in the equity market earlier.
On Tuesday, the Nikkei 225 stock index crossed 53,000 for the first time ever minutes after the opening, and gained as much as 1,800 points during the day. It closed up 3.1% and more than 1,600 points. ( The Japan Times)
If you have some Japanese shares well played. If you want a real historical perspective it did not quite make 40,000 in the last mega boom in 1989. Also back in 2013 it turned from around 7500 as it became clear that what became called Abenomics was on the horizon. So we have been on quite a ride since then.
The Tokyo Whale
There is a particularly Japanese feature as over time the Bank of Japan began to buy equities firstly in penny packets but then in scale as part of the Abenomics strategy. In Covid times it really stepped up buying on down days and becoming the most literal version of the plunge protection team we have seen. Over time it bought some 37,186,178,276,000 Yen of them which is why I call it The Tokyo Whale.
That 37 trillion Yen or so is now “worth” around 90 trillion.The reason why I have put it in quotation marks is how do you sell a position of such size? That is before you get to the message being sent by a central bank selling its own equity market.
The bond market conundrum
So far we have looked at things which Japan Inc will have considered to be a success. But now we have a clear failure and it comes from this.
Japan’s 10-Year Treasury Yield jumps to highest level in more than 27 years. (Barchart)
Actually that was from the 6th of this month when it reached 2.13%. But this morning it has risen to 2.17% and it was not that long ago it seemed significant when it rose above 1%. There are now quite a few areas of Japanese economic life singing along with Queen and David Bowie.
Pressure: pushing down on me
Pressing down on you, no man ask for
Under pressure that burns a building down
Splits a family in two
Puts people on streets.
We can start with The Tokyo Whale which has over 544 trillion Yen of these and if we look at it in futures terms then it bought as high as 155 but the price fell below 132 earlier. We know that this is a big problem because back on October 2nd 2023 Bank of Japan Governor Ueda denied it.
For example, the FRB, like the Bank of Japan, uses the amortized cost method and discloses
unrealized gains/losses as reference information. As of March 31, 2023, the FRB held substantial unrealized losses on its bond holdings, amounting to 0.9 trillion dollars.
However, this does not directly affect its actual profits/losses, as in the case of the Bank of
Japan.
He had no idea how bad things were about to become for The Tokyo Whale and this year looks awful for its position as it will have to declare interest or carry losses as even a 0.75% interest-rate is too much for the yield on its holdings much of which is at 0%. For newer readers this is why it has been so slow to raise interest-rates.Or the central banking tail has wagged the overall Japanese economy.
But wider there will have been changes as for once Japanese savers have an actual return.But on the other hand borrowers must feel like there has been an electric shock.
Remember many of these changes in Japan are internal as the bond market is largely domestic. So the private-sector initially wins but the public-sector loses via higher debt costs. New bond investors win but existing ones have had an awful time.
Let me just mark that so far we have seen little impact from the Carry Trade.
Comment
The reality is that the above has been largely driven by the appearance of Abenomics 2.0 and what has become called the “Takaichi Trade” after the new Prime Minister.. The latest moves have been driven by election rumours which are presumably at attempt to strengthen her position. Such a scenario would lead to an even more expansionary fiscal policy. So let me leave you with a question. If fiscal policy worked in Japan why do we always apparently need more of it?
