USDJPY fixed at 200 yen?
Is one of ten self-titled Outrageous 2023 predictions made by Saxo Bank.
In early December, 2022, Saxo Bank released a series of article titled Outrageous Predictions 2023: The War Economy.
The predictions range the gamut from French President Macron resigning to gold rocketing to USD 3,000 as central banks fail to reign in inflation but the prediction that caught my eye was the title in this article; that Japan in 2023 will set a floor price for the USDJPY pair to 200 yen to the dollar while the nation overhauls its financial system.
The prediction, written by John Hardy, Head of FX strategy at Saxo Bank, states:
Japan mobilised hundreds of billions of USD in its currency reserves in 2020 to defend the Bank of Japan’s (BoJ) unmoved monetary policy and the JPY itself as the BoJ refused to hike the policy rate from -0.1 percent or to lift the yield cap on 10-year Japanese government bonds at 0.25 percent. As 2022 rolls into 2023, the pressure on the JPY and the Japanese financial system mounts again on the global liquidity crisis set in motion by the vicious Fed policy tightening and higher US treasury yields.
Initially, the BoJ and Ministry of Finance deal with the situation by slowing and then halting currency intervention after recognising the existential threat to the country’s finances after burning through more than half of central bank reserves. But as USDJPY rises through 160 and 170 and the public outcry against soaring inflation reaches fever pitch, they know that the crisis requires bold new action. With USDJPY soaring beyond 180, the government and central bank swing into motion.
First, they declare a floor on the JPY at 200 in USDJPY, announcing that this will only be a temporary action of unknown duration to allow for a reset of the Japanese financial system. That reset includes the BoJ moving to explicitly monetise all its debt holdings, erasing them from existence. QE with monetization is extended to further lower the burden of Japan’s public debt, but with a pre-set taper plan over the next 18 months. The move puts the public debt on course to fall to 100 percent of GDP at the end of the BoJ operations, less than half its starting point. The BoJ policy rate is then hiked to 1.00 percent and all yield-curve control is lifted, which allows the 10-year rate to jump to 2.00 percent.
Banks are recapitalised as needed to avoid insolvency and tax incentives for repatriating the enormous Japanese savings held abroad see trillions of yen returning to Japanese shores, also as Japanese exports continue to boom. Japan’s real GDP drops by 8 percent on reduced purchasing power even as nominal GDP rises 5 percent due to cost of living increases, but the reset puts Japan back on a stable path and establishes a tempting crisis-response model for a similar crisis inevitably set to hit Europe and even the US eventually.
Very bold prediction but something possible according to the Coin Bureau in a recent video released on January 6th, 2023.
Video below starts at the specific point they discuss John Hardy’s prediction on the USDJPY potential peg in 2023:
Should this peg come to pass, Japan would in essence be making itself a live trial case for banking reform that other regions like the US or the EU could emulate.
There is precedent for other developing nations to take Japan’s economic lead. The money printing that characterised the economic response to the pandemic was basically the same strategy Japan began in 2012 with the election of Shinzo Abe on his platform of Abenomics.
Viewed in that lens, watching Japan overhaul its financial and banking systems with a USDJPY peg isn’t that farfetched of a scenario depending on how it goes for Japan.
What would this mean for Japan residential real estate?
Should the BoJ monetise Japanese debt like John Hardy predicts, then inflation would rise rapidly and that would include property prices and rents.
To Japanese buyers and renters, the dominant force in the nation’s real estate market, this would mean higher costs of living. Everything from vegetables to meat to utilities to automobiles and everything else priced in yen would rise, pressuring household budgets.
To protect the existing quality of life residents of Japan currently enjoy, wages would need to increase, something that had eluded the Japanese citizenry since the advent of Abenomics, the current money-printing scheme in place since 2012.
While Japan’s Debt-to-GDP ratio increased, wages haven’t in any meaningful way. An example is Tokyo programmers are now being touted as cheaper than Vietnam; good for business leaders, terrible for domestic workers.
It isn’t all doom and gloom however; only those earning in yen will see their purchasing power rapidly deteriorate. If you are coming from USD looking to purchase Japanese property then you are in luck should the yen peg at JPY 200 to the dollar.
Everything becomes half price essentially and given Japan prioritizes stability over all else, you wouldn’t see the kind of social discontent you might see in Greece or France.
So prices and rents rise and the Japanese consumer must go without a lot in order to keep paying payments for their home but they most likely will.
Ruchir Sharma wrote last weekend in the Financial Times that…
Quietly, Japan is turning for the better. Growth in the working age population, which turned negative in Japan three decades ago, is about to turn negative across the developed world. Measured as a share of the economy, private debt is on average higher in other developed economies than in Japan.
Japanese households and corporations reduced their debt load for much of the last decade, and will be less hard pressed in a tight money era than many outsiders may assume. Profit margins have been rising steadily. The cost of labour, adjusted for worker productivity, is now lower in Japan than in China.
In short, if the rest of the world is on fire with rampant inflation, then Japan should be better off than most. The Japanese worker will go without but they will still have their homes.
Whether they have the ability to borrow in order to purchase a property is the main thing to watch moving further into 2023 and beyond. If Saxo Bank’s prediction is correct then the yen pegging itself at ¥200 to the dollar could mean Japanese companies are more cost competitive on a global market allowing them to increase profits, but the lack of Japan Inc’s track record of passing those profits on in the form of increased wages doesn’t leave one able to think the Japanese consumer will be better off.
In fact, it might mean they are worse off which could spell pain for the property market.