One of the biggest unconfirmed secrets of recent market action was whether or not there was a Shanghai Accord in February, in which the G20 and central bankers decided to push the dollar lower to benefit China at the expense of Japan and Europe, both of whom have suffered substantially in recent weeks as a result of their own currencies surging, pushing local stock markets lower (and sending European banks sliding).
Earlier today, Japan's government spokesman Suga came as close as possible to admitting that there was in fact a tacit "Shanghai Accord" agreement when he said that the Group of 20's agreement to avoid competitive currency devaluation "does not mean Japan cannot intervene in response to one-sided currency moves."
It got better: in an interview with Reuters Suga added that Japanese Prime Minister Shinzo Abe's comment to the Wall Street Journal last week that countries should avoid "arbitrary intervention," was misunderstood and does not rule out intervention for Japan, Suga said.
And yet it did rule out intervention until now? He clarified. "What the G20 is talking about is arbitrary intervention, which is different from responding to a one-sided move," Suga told Reuters in an interview on Saturday.
So arbitrary is not really arbitrary if as a result of other arbitrary devaluations the market decides to focus on Japan... which sound oddly like Obama defending Hillary and explaining how confidential is not confidential.
As Reuters notes, some traders have said Japan cannot sell its own currency now, because the G20 warned countries in February to refrain from competitive devaluation. Suga, who coordinates other ministers in Abe's cabinet, rejected this idea outright and said Abe's remarks about arbitrary intervention in a Wall Street Journal interview last week were misunderstood.
"The prime minister's comments were based on the G20 understanding that long-term manipulation of currencies is undesirable."
As a reminder, the last time Japanese authorities intervened directly in the market was in 2011, when Tokyo got an explicit G7 consent to stem a yen spike driven by speculation that a devastating earthquake and nuclear disaster in March would force Japanese insurers to repatriate funds to pay claims.
What is fascinating is how weak even Japan's attempts at verbal intervention have become.
The attempts at posturing continued:
Suga also rejected the argument that the adoption of negative rates was a sign the BOJ's attempts to meet its 2-percent price target had reached a limit.
Abe is meeting foreign economists to prepare to host a summit of G7 finance ministers and central bank governors in May, where he will urge other countries to coordinate policies to accelerate global growth.
"The prime minister strongly believes G7 should lead the global economy with sustainable growth," Suga said.
At this point Japan has become such a joke in trader circles, the nickname which we penned for Kuroda aka "Peter Panic", appears to have stuck.
Of course, there is a quick way to find out just how much leeway Japan actually has: if at the next BOJ meeting, one which have taken place after a tremendous surge in the Yen which is up over 10% YTD, Kuroda does nothing, then as expected all of the above will have been merely the latest bout of ridiculous posturing, and the Shanghai Accord indeed made it so that only the USD is allowed to weaken.
Meanwhile, keep an eye on the USDJPY downside. As we reported last week, this is where various banks expect the BOJ will have no choice but to intervene:
- Bank of Singapore: 100
- BofAML: 105
- CBA: 100
- Daiwa Securities: 100
- JPMorgan: 95
- Julius Baer: 100-105
- Macquarie: 100
- Mitsubishi UFJ Morgan Stanley: 99
- NAB: 100
- Nomura: 105
- RBS: 105-110
- Societe Generale: 104
- Swissquote Bank: 100
- Westpac: 106.5
Finally, here is SocGen chiming in on the matter with a note released this afternoon.
We do not believe in a “secret” currency agreement reached at the February G20 meeting in Shanghai. We do, however, believe that the official statement places certain limitations of what policymakers can do with the sentence ”we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes”. Interestingly, Chief Cabinet Secretary Suga noted in a Reuters interview on Saturday that the G20 statement does not exclude intervention against “one-sided” currency moves.
To our minds, intervention is likely to remain verbal for now given not only the poor track record of one sided intervention and the fact that politically the situation is challenging for Japan as it prepares to host the G7 summit in May. Japan last intervened unilaterally in October 2011; the impact proved short-lived and back then USD/JPY was below 80 when the intervention took place. The March 2011 intervention was more successful, but this one enjoyed the blessing of the G7 post the Fukushima disaster. Then too, USD/JPY was below 80 when the intervention began.
Turning to the BoJ, the recent move in the yen has not changed our probability of 30% for additional easing. Our Chief Japan Economist, Takuji Aida, would increase this to 40% if USD/JPY breaks 105. The problem of effective BoJ tools remains, however. Given the poor public image of negative rates, PM Abe would be amongst those disappointed to see it used again and not least ahead of the Upper House elections in July.
More likely to our minds is that PM Abe will use the current situation to further build the case to delay the consumption tax hike (due next April) as part of a new fiscal package that we expect will be released in the course of May. Ironically, such a policy could be argued to favour further yen strength - at least in the short-term.
Perhaps, although Abe has made it repeatedly clear that Japan’s sales tax will be raised to 10% from 8% in April 2017 unless there is a"barring a crisis like the one caused by the collapse of Lehman Brothers."
So Perhaps all Japan needs to send its Yen crashing again is another Lehman-like crisis? Surely that too can be arranged.