Yen, Deflation, and Labor

Three month LIBOR fixings, if they are still meaningful, are poised to cross in the yen and dollar, with latter set to rise above the former. Recall that on August 24th US 3 month LIBOR was fixed below 3-month yen rates. Today the spread stands at less than 1 bp.

Even though other parts of the dollar LIBOR fixing term structure was above LIBOR yen fixings, some observers recognizing this as a benchmark focused on the yen positive implications of it not being the low rate country. Since Aug 24, the yen has been the second strongest currency against the dollar, appreciating almost 4%, trailing the Australian dollar's 7.5% gain, but outperformed the other dollar-bloc currencies--C$ 3.1% and NZD +2.2%.

Both sides of the spread explain why 3-month LIBOR fixings are about to switch. Three month dollar rates have risen for the 4th session today. Bernanke and Co. may emphasize that last week's discount rate hike doe snot change monetary conditions and is not a prelude to a Fed funds rate increase, but 3-month LIBOR was fixed today at its highest level since Jan 5th.

Three-month yen LIBOR fell for the second day today. We had argued that TIBOR--Tokyo Interbank Offered Rate--has consistently been higher than LIBOR-- a premium many Japanese banks pay. TIBOR has been steady in recent sessions (~44 bp) at the lowest level since late Oct 2006.

That said, note that LIBOR fixings are an average price and deals are in factor going through at rates below yen LIBOR fixing rates.

Since the BOJ announced the JPY10 trillion 3-month facility for Japanese banks on Dec 1, TIBOR has slipped around 6 bp.

Meanwhile the MOF is pressuring the BOJ to do more to fight deflation. The GDP deflator in Q4 was showed the largest drop on record. In fact, it was the fact of falling prices that flattered Japanese GDP. Nominal GDP grow 0.2% in the Oct-Dec quarter after contracted 0.5% in the previous quarter.

The BOJ has began fighting back and is expressing concern about the large government deficit and debt. The MOF's point is that deflation makes it more difficult to address fiscal issues. The BOJ is buying JPY1.8 trillion (~$20 bln) a month in JGBs.

The near-term outlook for the yen is somewhat positive after the dollar was turned back from above JPY92.00. There is also much attention being paid to the large Toshin funds being set up this week, a negative for the yen. Past this week, year-end repatriation may be positive, though the historical record is not necessarily strong.