The dip in 10-year US Treasury yields (back below 3%) looked set to take the pressure off Governor Kuroda and the BoJ for a while. But the yen is hitting new lows against the dollar, sliding to below 137 yesterday. Yields on longer-dated JGBs (30- and 40-years) are climbing even as global growth concerns mount.
Price pressures are once again testing the BoJ’s resolve to keep its yield cap, with the yen and longer-dated JGBs acting as release valves. The June PMI revealed “a series record increase in prices charged for goods and services in Japan.” In the Tankan survey for June, the forecast index for input prices (all enterprises) rose past the 2008 peak, reaching a 42-year high.
Timing is critical here: global economic recession fears will probably emerge in time such that even a shift higher in the yield cap will not necessarily lead to a significant repricing of US Treasuries. The risks were obviously much greater when 10-year Treasury yields were climbing.
But the yen may still fall to 140 over the summer because a) currency markets are punishing net energy importing currencies, b) the flight to safety is pushing up DXY, and c) the Japanese inflation numbers are lagging the US.
Indeed, companies that participated in the June Tankan survey projected the yen to average 118.96 against the dollar for FY 2022. The speed of the yen sell-off will continue to push import-prices higher.
