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Japan in ‘tricky spot’ on yen as Trump meeting looms, Pimco says

Bloomberg

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The Bank of Japan is seeking to uphold its monetary policy without giving the impression it is weakening the yen before Prime Minister Shinzo Abe meets with U.S. President Donald Trump this week, according to Pacific Investment Management Co.

With Trump criticizing Japan for devaluing its currency last week, investors began to question the BOJ’s commitment to its easing policy. BOJ had to spend ¥1.17 trillion ($10.5 billion) buying back bonds on Friday, as it sought to bring the surging 10-year yield down closer to its stated aim of around zero percent.

“They are in a tricky spot,” said Andrew Balls, chief investment officer of global fixed income at Pimco. “And they don’t want to get too far away from the yield target. At the same time there’s the Trump angle.”

Traders have been buffeted by a slew of currency remarks from the U.S. administration in recent weeks, with Trump and another official accusing China, Japan and Germany of devaluing their currencies to gain a trading advantage. The greenback has surged more than 15 percent against the yen in the fourth quarter.

The 10-year yield in Japan surged to a one-year high of 0.15 percent Friday after investors deemed the BOJ’s initial bond-buying operation as inadequate. Some analysts had questioned if Trump’s criticism had played a part in BOJ’s deliberations, before the central bank offered to buy an unlimited amount of bonds at a fixed cap, reaffirming its commitment to keep the yield around zero percent. The 10-year yield fell back to 0.1 percent subsequently.

The yen is likely to be sensitive to any further criticism of Japan’s monetary policy during Trump’s meeting with Abe at the White House on Friday, according to Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. Abe is set to reassure Trump that Japanese policymakers aren’t deliberately devaluing the yen and the loose monetary policy is aimed at defeating deflation in Japan, Hardman wrote in a report dated Feb. 6.

“They are trying to maintain the integrity of their yield target while not looking like they are doing too much intervention on the FX side,” Pimco’s Balls said.

Trump said a week ago that China and Japan “play the money market, they play the devaluation market and we sit there like a bunch of dummies.” On the campaign trail in 2015, Trump accused Japan of currency manipulation.

Abe told the Diet last week it’s inaccurate to say Japan is devaluing the yen, and he would explain Japan’s monetary policy to Trump if necessary. The government issued a speedy correction to Finance Minister Taro Aso’s comments Friday on whether the nation’s monetary policy was aimed at weakening the yen, underscoring the sensitivity of the issue.

“The comments from the Trump administration on Japan and Europe raise this question of whether monetary policy aimed at domestic factors could get you on the wrong side of the Trump White House,” Balls said.