Having already lost more than 10% of its value versus the US dollar this year, the yen plunged further overnight after Bank of Japan Governor Kazuo Ueda indicated monetary policy will stay easy as he kept rates unchanged and showed little to no support for the embattled currency during the press conference.

While investors had not expected the BoJ to change its policy this week, there was an expectations that Ueda would strike a hawkish tone regarding future rate rises to slow the yen’s decline.

Instead, Ueda said at a news conference on Friday that the central bank’s board members judged there was “no major impact” from the weaker yen on underlying inflation for now.

“Currency rates is not a target of monetary policy to directly control,” he said.

“But currency volatility could be an important factor in impacting the economy and prices. If the impact on underlying inflation becomes too big to ignore, it may be a reason to adjust monetary policy.”

And that sent the currency reeling (amid chaotic swings) back above 157/USD…

Source: Bloomberg

“There is no intention by the BoJ to stop the yen’s decline, at least looking at its statement and its outlook report,” said UBS economist Masamichi Adachi.

“The finance ministry will have to act [to stem the yen weakness]… It would have been more effective if both the government and the BoJ faced the same direction,” he added.

Blowing further below the ‘interventionist’ levels seen previously to a fresh 34-year low…

Source: Bloomberg

“Markets remain on high alert for any indication of whether the yen’s current weakness will be interpreted as a lasting inflationary signal,” said Naomi Fink, global strategist at Nikko Asset Management.

“The BoJ however is likelier to find any knock-on impact from yen weakness upon inflation as more concerning than short-term currency moves.”

Driving the depreciation is the yawning gap between the interest rates in the US – which are at highest in decades after the Fed’s aggressive tightening cycle last year – and those in Japan, where borrowing costs remain stubbornly low near zero.

“Intervention is possible at anytime, but it could have been just someone selling a large lot, which stoked intervention speculation and spurred follow-through moves,” said Koji Fukaya, a fellow at Market Risk Advisory Co. in Tokyo.

“It does not look like intervention, but the only way to confirm is to check data that will be released later by the Ministry of Finance.”

Policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast.

Finance Minister Shunichi Suzuki reiterated after the BoJ meeting that the government will respond appropriately to foreign exchange moves.

Potential triggers for interventions are public holidays in Japan on Monday and Friday next week, which bring the risk of volatility amid thin trading.

“Should the yen fall further from here, like after the BOJ decision in September 2022, the possibility of intervention will increase,” said Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui Banking Corp.

“It is not the level but it’s the speed that will trigger the action.”

But so far, nothing! And so the market continues to call Ueda and Suzuki’s bluff, knowing full well that a sudden intervention will perhaps briefly support the currency but will pancake the current gains in Japanese stocks.

However, not everyone is convinced intervention is imminent.

In a note this morning, Deutsche Bank says the currency’s decline is warranted and finally marks the day where the market realizes that Japan is following a policy of benign neglect for the yen.

We have long argued that FX intervention is not credible and the toning down of verbal jawboning from the finance minister overnight is on balance a positive from a credibility perspective. The possibility of intervention can’t be ruled out if the market turns disorderly, but it is also notable that Governor Ueda played down the importance of the yen in his press conference today as well as signalling no urgency to hike rates. We would frame the ongoing yen collapse around the following points.

Yen weakness is simply not that bad for Japan. The tourism sector is booming, profit margins on the Nikkei are soaring and exporter competitiveness is increasing. True, the cost of imported items is going up. But growth is fine, the government is helping offset some of the cost via subsidies and core inflation is not accelerating. Most importantly, the Japanese are huge foreign asset owners via Japan’s positive net international investment position. Yen weakness therefore leads to huge capital gains on foreign bonds and equities, most easily summarized in the observation that the government pension fund (GPIF) has roughly made more profits over the last two years than the last twenty years combined.

There simply isn’t an inflation problem. Japan’s core CPI is around 2% and has been decelerating in recent months. The Tokyo CPI overnight was 1.7% excluding one-off effects. To be sure, inflation may well accelerate again helped by FX weakness and high wage growth. But the starting point of inflation is entirely different to the post-COVID hiking cycles of the Fed and ECB. By extension, the inflation pain is far less and the urgency to hike far less too. No where is this more obvious than the fact that Japanese consumer confidence are close to their cycle highs.

Negative real rates are great. There is a huge attraction to running negative real rates for the consolidated government balance sheet. As we demonstrated last year, it creates fiscal space via a $20 trillion carry trade while also generating asset gains for Japan’s wealthy voting base. This encourages the persistent domestic capital outflows we have been highlighting as a key driver of yen weakness over the last year and that have pushed Japan’s broad basic balance to being one of the weakest in the world. It is not speculators that are weakening the yen but the Japanese themselves.

The bottom line, Deutscxhe concludes, is that for the JPY to turn stronger the Japanese need to unwind their carry trade. But for this to make sense the Bank of Japan needs to engineer an expedited hiking cycle similar to the post-COVID experiences of other central banks. Time will tell if the BoJ is moving too slow and generating a policy mistake. A shift in BoJ inflation forecasts to well above 2% over their forecast horizon would be the clearest signal of a shift in reaction function. But this isn’t happening now.

The Japanese are enjoying the ride.

But there is potential for yen upside as Bloomberg’s Simon White notes that profit taking on foreign asset positions might soon prompt some yen repatriation and pressure USD/JPY lower.

If it is perceived that the yen won’t get much cheaper due to intervention risk, domestic investors might choose to start switching some of their US equity positions back to the domestic market, repatriating yen and pressuring USD/JPY lower in the process.

The chart below shows that on the year, the Nasdaq in yen terms and the Nikkei are both up by the same 13%-14% on the year. A stronger yen would present an ongoing headwind to the US position.

Equity positions are typically less FX hedged than bond positions, meaning that the repatriation of the currency is not neutered by the unwind of the hedge.

The dynamics of spot trading, options barriers and potential intervention as well as US PCE data released later today will dominate the currency’s short-term gyrations, but the slightly longer-term considerations of profit taking on foreign positions will start to drive the medium-term outlook.

Once that trend establishes itself, longer-term drivers of the yen will come into focus. Japan is the world’s largest net creditor, and there is a significant structural short in the yen.

The country’s net international investment position is $3.3 trillion, but its net position in portfolio assets, i.e. so-called hot flows that could be liquidated quickly, is $4.4 trillion.

Only a fraction of that being repatriated has significant potential to drive the yen considerably higher.

The question is, how much pain is China willing to take from its regional neighbor’s ‘devaluation’?

Authored by Tom Ozimek via The Epoch Times (emphasis ours),

A record-breaking number of illegal immigrants crossed the U.S.-Mexico border last month, according to data released Friday by U.S. Customs and Border Protection (CBP), as the border crisis continues to rage with no end in sight.

A group of more than 1,000 unvetted immigrants wait in line near a U.S. Border Patrol field processing center after crossing the Rio Grande from Mexico, in Eagle Pass, Texas, on Dec. 18, 2023. (John Moore/Getty Images)

A stunning 371,036 encounters were caught entering the United States illegally in December, the data show, breaking the previous record of 341,392 set in August 2023.

Encounters along the southwest land border also set a new record, hitting 302,034, per other data released by CBP on Jan. 26

The record-shattering numbers come ahead of House Republican efforts to impeach Department of Homeland Security (DHS) Secretary Alejandro Mayorkas for his handling of the illegal immigration crisis.

Rep. Mark Green (R-Tenn.) is expected to introduce articles of impeachment against Mr. Mayorkas next week.

“Secretary Mayorkas has outdone himself yet again—never have we seen such catastrophic numbers, even with historically high encounter numbers on his watch,” Mr. Green said in a statement. “December’s numbers serve as more undeniable proof that Secretary Mayorkas must be impeached.”

Intentional ‘Disaster’?

Mr. Green said that not only are the record high numbers a “disaster,” but he alleged that they are intentional.

“This staggering number of encounters at our borders only happens by design and a willful refusal to comply with the laws passed by Congress,” Mr. Green said, accusing the DHS chief of having “intentionally opened our borders.”

Mr. Green, like many of his fellow Republicans, has accused the Biden administration of relaxing border policies and flinging open the door to a sharp influx of illegal aliens.

Biden administration officials have rejected such allegations, claiming they’re doing all they can to stem the influx and variously blaming factors like seasonal fluctuations, a broken immigration system—even climate change.

Voters, meanwhile, have grown increasingly concerned about the border crisis, with a recent poll showing that immigration has become the top concern, shunting inflation into second spot.

“They are very concerned about immigration, inflation, and crime, and that’s why many of them are saying they want a new president,” Mark Penn, co-director of the Harvard CAPS / Harris poll and Stagwell chairman and CEO, said in a Jan. 22 statement.

Voters cast their ballots in Portsmouth, New Hampshire, on Jan. 23, 2024. (John Fredricks/The Epoch Times)

‘Give Me the Money’

President Joe Biden, whose approval on immigration sank to 35 percent in the poll, recently admitted that the border is not secure—although he denied his policies have had anything to do with it.

Mr. Mayorkas recently pinned the blame for the influx on Congress, or rather its failure to make legislative changes and provide more money for border security.

President Biden, too, has seen funding as key, most recently when he responded to a reporter asking him if he believed the border was secure.

“No, it’s not,” President Biden replied. “I haven’t believed it for the last 10 years. And I’ve said it for the last 10 years … give me the money.”

President Joe Biden speaks during a campaign event at Montgomery County Community College, in Blue Bell, Pa., on Jan. 5, 2024. (Drew Angerer/Getty Images)

Former President Donald Trump, under whose tenure (and tough border policies) the number of illegal crossings fell significantly, has been a sharp critic of his successor.

“When I was President, we had the most secure Border in History,” he wrote in a Jan. 25 statement. “Joe Biden has surrendered our Border and is aiding and abetting a massive Invasion of millions of Illegal Migrants into the United States.”

The former president accused President Biden of “fighting to tie the hands” of Texas Gov. Greg Abbott in his efforts to bolster border security on his own, without federal help.

Texas is embroiled in a high-profile conflict with federal border protection agencies over the use of concertina wire along the southern border.

The Biden administration sued Texas over the razor wire, and the U.S. Supreme Court ruled against Mr. Abbott on Jan. 22 and allowed federal agents to cut Texas’ concertina wire barriers.

Unphased by the court order and the Biden administration’s criticism, Mr. Abbott said on Thursday that he would add more razor wire “to make sure we are doing even more to secure the border.”

Texas National Guard soldiers install additional razor wire along the Rio Grande in Eagle Pass, Texas, on Jan. 10, 2024. (John Moore/Getty Images)

‘Invasion Clause’

Declaring that the influx of illegal immigrants into his states amounts to an “invasion” that the Biden administration has failed to repel, Mr. Abbott on Jan. 24 invoked what’s been dubbed the invasion clause of the U.S. Constitution.

“The failure of the Biden Administration to fulfill the duties imposed by Article IV, § 4 has triggered Article I, § 10, Clause 3, which reserves to this State the right of self-defense,” Mr. Abbott said in a statement.

“For these reasons, I have already declared an invasion under Article I, § 10, Clause 3 to invoke Texas’s constitutional authority to defend and protect itself,” he said.

“That authority is the supreme law of the land and supersedes any federal statutes to the contrary,” the Texas governor added.

Texas Gov. Greg Abbott, left, listens as Republican presidential candidate and former President Donald Trump, right, speaks to Texas state troopers and guardsmen during a Thanksgiving meal at the South Texas International Airport, on Sunday, Nov. 19, 2023. (AP Photo/Eric Gay)

President Trump expressed support for Mr. Abbott’s move and called on states to deploy National Guard troops to support Texas in its efforts to bolster border security.

“We encourage all willing states to deploy their guards to Texas to prevent the entry of illegals and to remove them back across the border,” President Trump said in a Jan. 25 statement.

President Trump further charged that President Biden was trying to hinder Mr. Abbott in his efforts to protect his state from the “onslaught” and, in fact, is working to keep the influx going “unchecked.”

The White House did not respond to a request for comment.