As Yen Crash Accelerates, It Puts Catastrophic End Of MMT Experiment In The Spotlight

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by Tyler Durden
Wednesday, Jun 08, 2022 - 03:23 PM

Back in March, we correctly predicted that the "Yen is At Risk Of "Explosive" Downward Spiral With Kuroda Trapped", and since then it's gotten from bad to worse for the currency, and the country that has become ground zero for the twilight of the dismal MMT experiment, which after decades of simmering is finally approaching its terminal, catastrophic, and hyperinflationary phase.

Overnight, the yen plunged to the lowest since 2002, with the USDJPY rising as high as 134.47 and accelerating its recent push higher...

... after the "trapped" BOJ governor, Haruhiko Kuroda, stuck to his usual talking points regarding the currency, monetary policy and economy, speaking in parliament Wednesday.

Like a perpetually broken record, Kuroda said that "a stable weaker yen is positive for the overall economy although its impact varies across economic actors," and that he was aware of criticism and complaint over the recent yen slump, adding that a rapid, major drop in the yen isn’t desirable as it increases uncertainty and makes corporate planning difficult.

Well, he may be "aware" of the risks and yet he is doing nothing just as the yen "slumps" for the simple reason we explained back in March: the BOJ can keep 10Y JGBs "stable" at 0.25% through “yield curve control” (dovish in normal times, catastrophically dovish at a time when the rest of the world is actively raising rates... but with Japan's debt load it really has no other choice), or keep the yen stable, but not both. And so far, Kuroda has picked stable rates, while letting the yen crater.

“Kuroda’s comments were the catalyst for accelerating yen selling, as they renewed market focus on monetary policy divergence,” said Jun Kato, chief market analyst at Shinkin Asset in Tokyo. “The picture of the yen being left out as a lone loser came to the fore as markets actively price in an ECB rate hike while the Australian dollar remains on an uptrend with its clear tightening stance.”

Meanwhile, as Bloomberg notes, the yen’s historic weakness is spreading from the dollar into other currency crosses: Bloomberg’s Correlation-Weighted Currency Index for the yen - a gauge of its relative strength against a broad basket of Group-of-10 peers - slumped to a seven-year low Wednesday.

While a handful of traders are still cautious about the chances the dollar-yen will break its 2002 high of 135.15, it now appears a virtual certainty with buying momentum in yen crosses increases the likelihood of that happening.

“There is a potential that such all-out yen weakness could drive dollar-yen higher past 135 with an overshoot to around 137,” said Hideki Shibata, senior rates and currencies strategist at Tokai Tokyo Research Institute.

Indeed, as Bloomberg's Robert Fullem writes, "the yen’s has a few resting places in its path as it relinquishes decades worth of gains" and sets the near-term target for some traders is the 2002 USD/JPY high of 135.15. Periodic waves of yen selling since it was at 110 per dollar have all exceeded 4%. The starting point for this wave was the most recent year-to-date high of 131.35. 

Longer-term, several strategist and Japan’s ex-Finance Minister Eisuke Sakakibara, otherwise known a Mr. Yen, have spoken of 150. The 1998 high is 147.66 and 152.63 is a 38.2% Fibonacci retracement level from 1982 peak of 277.45. An inverse head and shoulder pattern on the monthly chart says a move to these lofty levels is increasingly likely.

The simplest signal of what's next for the yen comes from 10Y yields: as Bloomberg's John Authers writes, the yen tends to be driven by the spread between yields on Treasury bonds and Japanese government bonds, but the latest appreciation for the dollar suggests that speculation is going beyond even that, as illustrated in this chart from Bank of America Corp.:

That increases the risk of a damaging “sudden stop” if and when the BOJ changes course. As Authers adds, the yen would behave like the removal of a currency peg (at least in theory - the BOJ is highly unlikely to intervene directly to shore up its currency as such a hawkish move would mean game over for its bond market). As DB shows in the next chart, the last time the BOJ made any attempt to sell dollars (and thus strengthen the yen) was as long ago as 1998.

And while there is no bottom in sight for the yen, the bigger problem is that this is starting to translate into higher prices, i.e., inflation. Yes, in a case of "be careful what you wish for you just might get it", we reported in April that "Yen's Problem Is That Japan Will Also See Inflation In 2022", and the lower the yen falls, the greater the imported (if not the desired wage-price spiral) inflation. In fact, it will get so bad, that at some point not even the BOJ will be able to "control" yield curves, at which point it will face a dire choice: either unleash an unprecedented liquidity flood, or let the curve catch up to reality, both of which would be dire outcomes for Japan, and will set the scene for the MMT endgame as the country where unorthodox central bank policy was incubated over the past 40 years - Japan was the first country to do ZIRP, NIRP, QE and central bank equity buying - comes to a jarring, catastrophic end.