Japan’s worries about rising prices loom over the yen


British muffins. Single malt whisky. Chocolate whip toast spread. For months, Japanese shoppers have had to prepare for the reality that global conditions will increase the price of Japan’s most basic food. Soy sauce, noodles and chicken will also be affected.

As the currency market approaches 2022, an interesting question is, what kind of risk does this bring? JPY, Because it fell below the 100 yen/dollar line for the ninth consecutive year, and continued weakness is still the favorite of speculative funds.

Official measures of potential inflation have begun to show (it has been emphasized that they have not done so for many years) Japanese prices Climb up gentlyHowever, according to analysts at Nomura Securities, internal corrections in public sentiment are exploding.

The number of articles (241) in the online edition of the Nikkei Shimbun that focused on all types of price increases increased by more than 330% in November compared with the same period last year. Food-related figures (45) have increased nearly six times during the same period.No matter how mild the price rises predicted in these stories, running a theory in the foreign exchange trading floor will have an impact on the overall sentiment Bank of Japan Ultimately it needs to be considered.

Nomura analysts pointed out that as a possible sign of this demand, the market’s response to food companies’ announcements of price increases has broken tradition. In the past, food stocks have risen due to such announcements, as the rise is expected to translate into stronger profits. Since the beginning of 2021, this correlation has collapsed. The stock market (correct or not) is betting that this time consumer sentiment may really start to absorb inflation concerns, behavior will adjust, and the decline in food manufacturer sales will exceed any rise in profit margins.

When this new atmosphere-a full 20 years have passed in Japan-emerges, most currency analysts are preparing their outlook for 2022 and reflect a year in which the yen has fallen 10% against the US dollar. . For most of 2021, their trading range is between 109-114 yen/USD. Since the summer, the yen has been at the low end of this range because the Fed’s voice has become stronger and the U.S.-Japan yield rate The gap has widened. Widen.

Correspondingly, driven by the fundamentals of the world economic recovery, global inflationary pressures, and the permanent currency transfer between Japan and Japan, most currency trading desks tend to regard the weakness of the yen in the past 11 months as a kind of “natural” Phenomenon—and therefore sustainable until further notice—phenomenon. Low yields and the rise of their overseas counterparts. At the real point of time in 2021, investors did not decide within a few days that the yen was cheap enough for a continuous buying frenzy. In fact, Benjamin Shatil, a foreign exchange strategist at JPMorgan Chase, pointed out that shorting the yen against the US dollar has always been one of the most reliable investors in the world in anticipation of rising U.S. yields.

The emergence of Omicron coronavirus variants that may change these fundamentals provides an interesting piece of evidence. Between the widespread recognition of the new pressure on or about November 26 and the yen’s rise to a 13-month high a week later, the currency rose by nearly 2%-a volatility that smelled of crowded trading and caught some people off guard . As some people have said, this is not the yen acting as a “safe haven”, but the sudden liquidation of some large yen short positions. Some of them have temporarily returned, but they will not do it seriously until the market is convinced that it is the fundamentals of interest rate differentials and not Omicron that has regained its dominance.

However, Shatil believes that the rise in food prices in Japan next year may intervene-not as a basis for a stronger yen, but as a risk that may once again threaten the re-accumulation of short positions. If in the next few months, commodity prices are still rising, and the Japanese find themselves worried about consumer prices and inflationary sentiments, then the money market is absolutely dependent on the perpetual dovish Bank of Japan and thus reliably widens the yield gap. Does it still make sense?

Foreign exchange analysts said that although the central bank is unlikely to turn into a hawk in any meaningful way, it is at least possible to respond to the shift in sentiment by moderately relaxing its “yield curve control” policy. This may not cause long-term changes in the fundamentals of the yen, but it may cause new volatility, which is one of the most reliable transactions ever in the foreign exchange market.

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