New Japanese prime minister’s dovish comments rekindle yen carry trade

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

An abrupt policy U-turn by Shigeru Ishiba, made within just 36 hours of being formally sworn in as Japan’s new prime minister, has rekindled market bets on the yen “carry trade” and sent the currency to a six-week low.

During Tokyo trading on Thursday, the yen dropped below ¥147 against the dollar, following an acute overnight fall in US market hours. Hedge funds are betting there will be no interest rate increases for at least four months under Ishiba and have begun to rebuild short positions in the yen.

The Thursday move followed confusing comments on Wednesday by Ishiba — a veteran politician who has historically avoided economic and market affairs — in which he said the Japanese economy was “not in an environment” for further interest rate rises by the Bank of Japan.

His comments emerged after a meeting on Wednesday with BoJ governor Kazuo Ueda. Ueda told reporters the central bank would adjust policy if the economy and prices moved in line with forecasts, but that there was “plenty of time” to determine whether this was really the case.

Ishiba’s blunt remarks, which were seen by some analysts as evidence that he has yet to appreciate his potential influence over markets, appeared strongly at odds with his previously more hawkish tone of support for the central bank, and for its attempts to “normalise” Japanese monetary policy after years in an ultra-loose stance.

The sudden fall in the yen, which has swung to gains and losses of about 12 per cent against the dollar this year, triggered a strong rally in Tokyo stocks on Thursday. The Nikkei 225 Average gained just under 2 per cent, led by stocks that traditionally benefit from a weaker currency.

“For right or wrong, the forex markets took Ishiba’s comments as a signal that he might start leaning on the BoJ to be more dovish, and so we’ve started seeing the yen carry trade coming back on,” said a Tokyo-based forex trader, who warned that the market was probably overestimating the force of Ishiba’s intended message.

A massive previous build-up of the yen carry trade, where speculators borrow yen to fund bets in other higher-yielding currencies, unwound spectacularly in early August, triggering a meltdown in Japanese equity markets.

Analysts cautioned against reading too much into Ishiba’s words, particularly given his lack of experience in public comments on monetary policy, and the fact that the new prime minister has called a snap general election for later this month.

“Ishiba’s comments were always likely to be more dovish because of the election: he does not want to go into that with equity market weakness, so it is reasonable to try to calm them down,” said Yujiro Goto, chief FX strategist at Nomura. Goto noted that Japanese stocks had plunged almost 5 per cent on Monday in the first trading session after Ishiba was named prime minister.

“At the same time, Ishiba does not want the currency to become too weak ahead of an election, as that raises import costs and the price increases are felt negatively by households,” said Goto. He still forecasts that the BoJ will raise interest rates again in December, and has not altered his ¥145 dollar-yen forecast for the end of this year, despite the new prime minister’s comments.

“There is a fine line between supporting the market and inviting in inflation, which is why we will probably not see any action to back up what Ishiba is saying. Talk is talk, and I don’t think he has any intention of undermining the Bank of Japan’s independence,” said Naomi Fink, chief global strategist at Nikko Asset Management.

Asahi Noguchi, a BoJ board member, told a press conference on Thursday that the central bank had the leeway to raise rates but had to move cautiously to avoid damaging the economy.