JPY: Consolidation followed by further strength - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the USD/JPY rate has fallen sharply back toward the 100.00 level and that might well be a level that prompts a period of consolidation but the trend remains intact and we expect levels below 100.00 to materialise soon.

Key Quotes

“The conclusion from the BoJ policy meeting last Friday and the fiscal stimulus package details yesterday is that the actions are unlikely to restore faith in Abenomics, which had been the catalyst for reviving inflation expectations in Japan. The 5yr/5yr inflation swap rate has turned higher since the middle of July after reaching lows not seen since late 2012 just as Abenomics was being launched but current levels remain low and indicative of scepticism over policy lifting inflation going forward.

The BoJ under-delivering relative to market expectations (admittedly unrealistic expectations) and the government announcing a demand-side fiscal stimulus package underline the perception that Japan can only deliver more of the same. This was reinforced today by the news that PM Abe will not make any changes to key cabinet posts in the cabinet reshuffle promised after his July Upper House election victory in July. Taro Aso will remain Deputy PM and Finance Minister;  Yoshihide Suga will remain Chief Cabinet Secretary; and Nobuteru Ishihara will remain as Economic and Fiscal Policy Minister.

The IMF’s annual Article IV on Japan was released on Tuesday and while welcoming the policy efforts of the BoJ and the government, it also urged for these measures to be taken in unison with more aggressive action on structural reform. Unsurprisingly, the measures mentioned focused on supply-side reforms that would help lift Japan’s potential growth rate. As the economy stands now, the chances of lifting nominal GDP by 20% to JPY 600trn by 2020 as PM Abe has targeted are close to non-existent.

The perception of policies being implemented that highlight the constraints of policy is likely to keep the yen on a strengthening path for now. August often proves a quiet month unless a risk event materialises that results in big moves in illiquid market conditions due to the holiday period. A seasonal bias is often cited as a reason to expect USD/JPY to drop – however, the last decade has seen five occasions when August was an up month for USD/JPY and five when it was a down month. Bar an unforeseen risk event, USD/JPY may start to consolidate around the 100-level.”