Economy

TOKYO (Reuters) – As the yen plumbs three-decade lows and pressure grows on Japan to intervene or make monetary policy changes, traders figure there is not much Tokyo can do to reverse the currency’s slide while interest rates and momentum are heavily skewed against it.The Bank of Japan (BOJ) sets policy on Friday with almost no expectation of a rate rise.It has no currency mandate but a weakened yen, which is at a 34-year trough on the dollar and record low levels in real terms, affects inflation because it raises import prices.Politicians have been describing its slide as excessive and BOJ Governor Kazuo Ueda has hinted at future rate hikes.Yet traders in foreign exchange markets, in thrall to a rising dollar, have barely stopped selling the yen through some 16 months of important and theoretically yen-positive shifts culminating in the BOJ’s first rate hike in 17 years in March.Japan has sloughed off yield caps and negative interest rates. The central bank has flagged a retreat from the bond market. And still the yen has remained the cheapest major currency to borrow and short-sell – all but sealing its fate. “In the short-term, BOJ hiking policy rates might not make material difference to the yen. The yen is currently driven more by U.S rates and the yield differential which is significant,” said Nathan Swami, Asia-Pacific head of foreign exchange trading at Citi in Singapore.”It might take a while for the BOJ to normalise policy fully and that should start to help strengthen the yen but the key question is what the Fed does in the meantime.”Increasingly, and to the delight of yen bears, markets expect the Fed will not do much. Pricing for as many as six Federal Reserve interest rate cuts this year has unwound on signs of sticky U.S. inflation and economic strength. Barely two are now anticipated.That leaves short-term U.S. rates above 5.25% for longer, while short-term Japanese rates sit at 0.1%, meaning the 22 bp increase priced in for Japan this year hardly moves the dial.At the ten-year tenor, U.S. yields are 375 basis points higher than Japanese yields, with the gap not far from over 400 bps touched last year – the widest in two decades.The yen traded as low as 155.74 this week. It is down 9.4% on the dollar this year and has lost more than 33% of its value in three years. This year the U.S. dollar index is up 4.3%.”When the dust settles, you’re still looking at a significant interest-rate differential,” said Bart Wakabayashi, branch manager at State Street (NYSE:STT) in Tokyo.JOB DONEMarket focus at the BOJ meeting falls mostly on three elements: policymakers’ inflation forecasts – where a rise would imply higher rates – governor Ueda’s tone at his news conference, and the central bank’s plans for bond buying.On all fronts investors see the central bank’s ability to move or surprise markets as limited, particularly as it already made a landmark exit from negative rates at its meeting in March.Inflation is nascent and, at 2.7%, is far lower than in the West. Sharp (OTC:SHCAY) rises in borrowing rates would be disruptive for Japan’s heavily indebted government and economy and so are likely to be avoided.Government bonds offer yields far below foreign sovereigns, which draw a constant flow of Japanese money abroad, weighing on the yen. The market is also so dominated by the BOJ, which owns more than half Japan’s quadrillion or so yen of debt on issue, that an unwinding is expected to take years, at least.Even if the BOJ were to cut its 6 trillion yen a month purchases by around one trillion yen, it would only lift the 10-year yield about two basis points, said Nomura strategist Naka Matsuzawa – hardly enough to shift investment flows.”Basically, I think the BOJ has done its job in (the) March meeting, including supporting the yen,” he said.To be sure, the speculators in the currency market hold their largest short yen position for 17 years, meaning a policy surprise would likely spook them and drive the yen up sharply.Intervention would also clear out shorts, but on its own is seen as unlikely to be able to reverse the yen’s course. Even large bursts of yen buying is just a drop in the bucket compared to the $7.5 trillion that change hands daily in the foreign exchange market. Japan is estimated to have spent as much as $60 billion defending the currency in 2022.”Intervention would definitely help dislodge speculative positioning in the short term,” said Citi’s Nathan Swami.”However, it might not fundamentally change the path of the currency…as we saw in the last rounds of interventions in September and October 2022, the yen did strengthen significantly initially post-intervention but might have provided longer term yen bears better entry levels to re-enter.”($1 = 155.4600 yen) More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Investors are increasing their bets that the Bank of Japan will need to keep raising borrowing costs as a weaker yen fuels inflation and puts pressure on the central bank to tighten its policy to prop up the currency.The BoJ’s calculus has been complicated by the shifting tone in the US, where Federal Reserve chair Jay Powell has signalled that interest rates may need to stay high to tame inflation. Traders have built up bets that the Fed could even tighten policy again.That has pushed the yen to 34-year lows against the dollar, sparking an unusually blunt warning from BoJ governor Kazuo Ueda that the central bank could act if the weaker yen impact became “too big to ignore”. The yen slid 0.28 per cent on Thursday to ¥155.62 a dollar.It comes only a month after Ueda started to unwind years of unorthodox BoJ policy with an exit from negative interest rates. Further increases in borrowing costs would be gradual to avoid sending shockwaves to global markets, Ueda indicated at the time.But the yen’s depreciation is stoking inflation by pushing up prices of imported goods. Core inflation, which excludes volatile food prices, rose 2.6 per cent from a year earlier in March. If inflation continues to stay above the BoJ’s 2 per cent target, Ueda may need to keep raising rates at a faster pace than he would want, analysts said, a scenario Japanese officials want to avoid since it could trigger a spike in government bond yields and abrupt shifts in investment flows.Two-year forwards on the overnight index swap rate — a benchmark of monetary policy expectations — show that investors now anticipate the BoJ’s policy rate to rise above 0.6 per cent from near zero following the shift in Fed expectations.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Many Japanese investors expected the BoJ’s policy rate would not rise above 0.5 per cent despite an end to negative rates. The rate has not been past that level since Japan’s 1998 financial crisis, according to Naka Matsuzawa, Japan macro strategist at Nomura.Initially following the March meeting, investors had forecast the BoJ’s next rate rise would be in September, but markets now expect the change in July, implying that the BoJ could raise borrowing costs twice more this year.“If markets start pricing in two rate hikes a year, that’s already a relatively fast pace and if expectations go over that, that means [inflation] is getting out of BoJ’s control,” Matsuzawa, said, adding that two rate rises would be akin to four by the Fed given Japan’s low underlying real interest rate.Kazuo Momma, executive economist at Mizuho Research Institute and a former head of monetary policy at the BoJ, said Ueda could end up in the same situation as Powell in 2020, when the Fed was forced into a rapid cycle of rate increases to tame inflation.“That’s the biggest risk the BoJ faces at the moment,” Momma said at a panel during an annual meeting of the International Swaps and Derivatives Association in Tokyo. “Interest rates are now at zero, but inflation at 2 per cent could become certain and concerns about an upside risk may arise.” You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The BoJ’s two-day policy meeting began on Thursday, and it is not expected to make a further increase in interest rates immediately.But analysts expect the BoJ to raise its core inflation outlook for fiscal 2025, and the focus will be on whether Ueda will strike a hawkish tone regarding future rate increases.Momma said the BoJ would also want to start to cut purchases of Japanese government bonds to normalise market activity, which could precede a rate increase.The weaker yen is a mixed blessing for Japan’s economy. It has boosted inbound tourism and fuelled a surge in corporate profits earned overseas. But a softer currency has raised living costs, hurt consumption and made it harder for smaller businesses to raise wages.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.For decades, the biggest challenge for the BoJ had been to achieve a mild increase in prices to ensure the economy did not sink back into deflation. But it wants price rises to be sustainable, driven by rising domestic wages and consumption, rather than the result of external pressures.“I think markets are underestimating the potential for the BoJ to do more. There’s compelling evidence that we have big structural change under way, particularly in the labour market,” said Derek Halpenny, head of research for global markets at Mitsubishi UFJ Financial Group.Guiding currency levels is not part of the BoJ’s mandate, so central bankers historically have been reluctant to address weakness in the yen. But the currency decline has been mainly driven by the gap in interest rates between Japan and the US, and analysts said Ueda was more willing to co-ordinate closely with the government to address the issue. On Tuesday, finance minister Shunichi Suzuki issued his strongest verbal warning that “the groundwork has been laid” for Tokyo to take “appropriate action” in the currency market, pointing to a rare joint statement by the US, Japan and South Korea expressing “serious concerns” about the decline in the yen and won. “The BoJ will not raise interest rates just because of the weaker yen, but it could bring forward the timing of its rate hike,” said Takahide Kiuchi, executive economist at Nomura Research Institute and a former BoJ board member.“After the BoJ ended negative interest rates last month, it gained a new weapon to influence the currency markets through verbal intervention as well as an actual rate hike.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an onsite version of our Europe Express newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday and Saturday morning. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Spain’s Prime Minister Pedro Sánchez has said he’s considering quitting in response to corruption allegations against his wife, and will announce whether to end his almost six-year-long premiership next Monday.Meanwhile, the Belgians have activated an EU crisis response mechanism over concerns about disinformation ahead of bloc-wide elections in June. Today, we report on how the Chinese company raided by the EU’s anti-subsidy watchdog has been earning . . . EU money. And our Paris bureau chief previews Emmanuel Macron’s big speech on the future of Europe this morning.Baggage handlersWhen EU investigators start going through documents from the raided offices of Chinese security equipment supplier Nuctech, they will find some familiar names in their business dealings: the bloc’s governments are some of its biggest clients.Context: Nuctech’s offices in Rotterdam and Warsaw were raided on Tuesday morning by EU investigators probing the company for breaching foreign subsidy rules. It is part of a slew of increasingly forceful trade measures being taken by Brussels against Beijing.The European Commission is accusing the company — which makes airport, freight and baggage scanners — of receiving unfair subsidies from Beijing that “distort” the market. But awkwardly, the commission has also signed off on spending EU funds to buy those products for use by national customs authorities.The company’s products are ubiquitous across Europe. From scanning the tens of millions of containers transiting the EU’s two biggest container ports — Rotterdam and Antwerp — to the luggage of passengers at Brussels’ Eurostar terminal. Some of those devices were put there thanks to EU funding, under the Customs Control Equipment Instrument, which has a budget of over €1bn to help member states update their equipment.Even before Tuesday’s raids, Nuctech had been triggering concerns. The US has since 2020 warned of “its involvement in activities contrary to the national security interests of the US” and “security risks posed by Nuctech equipment . . . given the company’s control by the PRC government”.European parliament lawmakers have also demanded action against the company, and condemned a 2022 decision to purchase Nuctech scanners by Strasbourg airport — the terminal many of them use to get to their monthly plenary sessions.“There is a reasonable ground to exclude companies like Nuctech because they are from a country with espionage programmes, which can compel all their businesses or citizens to comply with any request form their services,” said Bart Groothuis, a Dutch liberal MEP. “They will weaponise dependencies against us.”Nuctech has denied the allegations and said it “is committed to defending its reputation of a fully independent and self-supporting economic operator”.Chart du jour: Greek tragedyGreece’s strong economic recovery has made it one of the best performers in the eurozone. But that has come with brutal costs for its long-suffering population, writes Valentina Romei.Mr EuropeWhen French President Emmanuel Macron delivered a landmark speech on the future of Europe at the Sorbonne University back in 2017, he sketched out an audacious vision to turn the bloc into a more independent, sovereign power by 2024. Today, a more experienced, crisis-hardened Macron will take to the same stage for what his advisers are billing as Sorbonne II, writes Leila Abboud. Context: An ardent pro-European, Macron will argue for moving on from his earlier “agenda for sovereignty” — much of which France believes has been achieved — to an “agenda for European power”, following the full-scale invasion of Ukraine and the Covid-19 pandemic. Macron’s 2017 speech is like a time capsule of the early months of his first presidency, when he swept into power by demolishing old French political parties and seeking to disrupt consensus in both Paris and Brussels. “The Europe of today is too weak, too slow and too ineffective, but only Europe can give us a true ability to act to face the big global challenges,” he said then.He will doubtlessly be less harsh today, given that he is now partly responsible for the state of the EU. What has changed is that other countries, crucially Germany, have come around to some of his positions — although Macron’s grandstanding and off-the-cuff remarks still rankle in many capitals. “The EU has never been more French,” said Georgina Wright, an analyst at the Montaigne Institute in Paris. “To an extent he was ahead of the curve — the ideas of sovereignty and industrial policy are no longer taboo, and the bloc is doing more on security and defence than ever.” Macron’s advisers are promising Sorbonne II will be more than a victory lap, and include specific proposals for where the EU should go next. One thing is clear: Europe’s disrupter-in-chief already has his eye on his legacy with three years left in office, and he wants Europe to be a big part of it.What to watch today Nato secretary-general Jens Stoltenberg visits Germany, meets defence minister Boris Pistorius.Latvian Prime Minister Evika Siliņa visits Sweden.Now read theseRecommended newsletters for you Britain after Brexit — Keep up to date with the latest developments as the UK economy adjusts to life outside the EU. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: europe.express@ft.com. Keep up with the latest European stories @FT Europe More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.A quarter of a century later it remains a resonant and notorious image of European arrogance. Michel Camdessus, then the French managing director of the IMF, stands over Suharto with arms imperiously folded as the Indonesian president, head bowed, signs a humiliating and wildly excessive list of conditions in return for an emergency loan during the Asian financial crisis in 1998. Now Indonesian accusations of oppression by Europeans are being aired again, this time over Brussels’ demands that palm oil producers prove that their exports to the EU do not cause deforestation. Indonesia’s economy minister has accused the EU of “regulatory imperialism”; the Indonesian foreign ministry’s videoed annual address last year contained an image of a jackboot marked with the EU logo stamping on a palm oil plantation.As Brussels’s attempts to manage its trading partners’ production processes proliferate — from standards on renewable fuels to deforestation to carbon emissions to plastic packaging and employment conditions — so do accusations of condescending heavy-handed coercion from those who have to comply.The bureaucratic intrusiveness of the deforestation regulation has aroused particular resentment. The EU has made some effort towards lightening the load: last year it set up a task force with Indonesia and Malaysia on implementing the rules. But there does not seem to be much appreciation of the dark historical resonances.Many of the countries affected by the deforestation regulation are former European colonies still growing colonial-era crops. The oil palm is native to west and central Africa, not south-east Asia. It was brought to the then Dutch East Indies by 19th-century European colonists and grown in plantations worked by indentured and forced labour shipped in from around the region.One of the large palm-growing companies active in Indonesia, Socfin, has a holding company listed on the Luxembourg stock exchange. It was originally founded in 1909 by a Belgian, Adrien Hallet, who grew rubber and palm oil in the Congo. The Belgian colonial presence in the Congo included viciously extractive colonists who cut children’s hands off as punishment for failing to meet rubber-tapping quotas.Indonesia won its independence from the Netherlands (which, like the rest of western Europe, razed most of its own forests centuries ago in the process of getting rich) in a bloody war in the 1940s. But the country’s palm-oil growers are still being forced to follow rules dictated in Europe. Large-scale foreign-owned producers such as Socfin will almost certainly find it easier to comply than will Indonesian smallholders.Framed like that, you can see how the EU’s pious insistence that its trade policy furthers “European values” might grate just a tiny little bit. It’s not the first time that clodhopping European insensitivity has irritated former colonies. During fractious negotiations on preferential trade agreements with the African-Caribbean-Pacific grouping of countries in 2007, then-trade commissioner Peter Mandelson unwisely said Nigeria “wants to sit like an elephant in the middle of the road” and obstruct progress. The Democratic Republic of Congo in 2010 banned the Belgian official Karel De Gucht, then the EU’s development commissioner (and later trade commissioner), from the country over comments he made about the former Belgian colony. In 2022 Josep Borrell, the EU’s foreign policy chief, was rightly criticised for describing Europe as geopolitically a “garden” and most of the rest of the world as a “jungle”, and suggesting that EU ambassadors were sent forth to tame the wilderness.Meanwhile, in post-Brexit Britain, the then home secretary Suella Braverman imperilled trade talks with India in 2022 by singling out Indians for overstaying their visas when visiting the UK. In practice, many middle-income countries show reserves of pragmatic tolerance that Europeans do not necessarily deserve. Indonesia, for example, continues to negotiate a bilateral trade deal with Brussels. Brazil, along with the other three South American countries that make up the Mercosur grouping, is ready to sign a trade agreement with the EU despite its own resentment over the deforestation regulation. Delhi appeared to use the outrage in India over Braverman’s unwise remarks as leverage to press its demands for more work visas in the UK-India trade talks rather than abandon the deal altogether.We are, after all, where we are. The pumping of carbon dioxide into the atmosphere by rich countries cannot be undone: the cities of Europe will not be flattened to allow the land to return to forest. No solution to climate change will be possible without the big middle-income countries reducing carbon emissions, though huge amounts of development aid to help the transition wouldn’t go amiss. But EU policymakers might just reflect that exploitative imperialism is a traditional European value too, and that what looks like progressive principle in Brussels can come across as hypocritical coercion on the receiving end.alan.beattie@ft.comClimate CapitalWhere climate change meets business, markets and politics. Explore the FT’s coverage here.Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here More