Turbulence like this isn’t normal. Central banks worried by inflation are in some ways fighting an inverse “currency war,” as weakness makes it harder for them to keep inflation low. That said, Switzerland is the great global inflationary outlier at present. Its latest headline number came in at 2.9%, which is the highest since 2008, but still vastly less alarming than in the UK (9%) or the U.S. (8.6%).
Then we come to the other great outlier, the Bank of Japan. To no great surprise, it stood pat in its latest meeting, keeping the target rate at -0.1%, and making no change to its “yield curve control” target of below 0.25% for the 10-year JGB. In the current international context, this is breathtakingly, perhaps irresponsibly dovish. The BOJ appears now to be the only central bank pursuing a conventional currency war by trying to down the value of the yen. This is despite its departure from lengthy precedent and actually alluding to the currency in its monetary policy statement, which came out a little more than an hour ago as I write at midnight in New York. This is what it said after the yen sank to its lowest level relative to the dollar in more than two decades:
"It is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices."
It’s possible there are translation problems, but most of us wouldn’t interpret that as a stirring declaration of intent. Currency traders appear to have interpreted it that way as well. At the time of writing (before the BOJ’s press conference which could always change things again), the yen is tumbling once more. I marked the points of the FOMC’s Wednesday meeting and the BOJ’s Friday (late Thursday in the U.S.) meeting in this chart:
It looks as though speculators will now gear up to attack the yen once more. Until its next meeting, at least, the BOJ appears set to continue its role as provider of precious cheap money to everyone else. The moment that the BOJ caves on controlling the yield curve, which cannot be delayed for much longer, is set up to be a very dangerous one. But as it stands, the BOJ under Haruhiko Kuroda has won its latest battle with speculators. The 10-year JGB yield has spent most of the week above the target of 0.25%, and at one point had its sharpest move since the policy was introduced in 2016. Following the meeting, it looks like bettors against yield curve control have conceded defeat, for now:
To be clear, such trading isn’t normal, and it's very dangerous. Volatility on this scale, involving Switzerland and Japan, long regarded as the sheet anchors of the global financial system, raises the risk of financial accidents. The BOJ’s continued intervention keeps conditions easier for the rest of the world, but also stokes further the fear of what could happen if it gives up on yield curve control, Japanese rates soar, and all those who’ve been enjoying a profitable bet against the yen lose their shirts.
Central banks are powerful. That’s not necessarily bad in itself; someone has to act as a currency’s guardian. But the way their decisions have stoked such swings this week is deeply unhealthy. This volatility is a symptom of the financial system’s over-reliance on activist central banks going back at least to 2008 and arguably a decade before that. That might not be their fault. It might be more attributable to an abdication of power by elected politicians. But we are now in the process of finding out the costs of more than a decade of dependence on central banks.
Survival Tips
As I've stayed up very late to write this, I'm delighted that a long weekend is in prospect, thanks to the U.S. national holiday for “Juneteenth,” the day when slaves in Texas finally learned of their emancipation in 1865. It's a worthy event to celebrate, and a great time to have a day off.
Also worthy of celebration: Paul McCartney's 80th birthday. I admit to having long been rather more of a John Lennon fan. But looking back at McCartney's music over the decades, his genius is undeniable. His greatest songs for the Beatles (which were mostly or entirely his rather than John's) include, I would say: Eleanor Rigby, Penny Lane, Here There and Everywhere, Helter Skelter, Martha My Dear, Hey Jude and Paperback Writer. Since then, his output has been more uneven, but included greatness in Live And Let Die, Pipes of Peace, My Brave Face, Band on the Run, and Coming Up.
Here's the Guardian's ranking of his post-Beatles output. And note that doesn't include two of the most popular Christmas ditties of all time, in Mull of Kintyre and Wonderful Christmastime. Yes, they're corny, but people really liked listening to them.
Have a good weekend everyone, and great Juneteenth for those who will get to celebrate it.
John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator and editor of the Lex column at the Financial Times, he is author of The Fearful Rise of Markets.