Forex Flash: The Changing landscape for Yen – Wells Fargo
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USD/JPY
FXstreet.com (Barcelona) - Nick Bennenbroek, Head of Currency Strategy at Wells Fargo sees that the Yen has been the stand out mover among the G10 currencies since late last year, falling 11% in the past three months.
He adds that Yen's decline has been due in part to a softer economy, with Q3 GDP contracting at a 3.5% QoQ annualized pace, and manufacturing and service sector confidence worsening in the Q4 Tankan survey. Those weaker economic trends prompted the Bank of Japan to ease its monetary policy stance, with the central bank increasing its asset purchase target at both its September and October meetings, taking that target from 45 trillion yen to 66 trillion yen.
Bennenbroek feels that the shift towards s increasingly aggressive policy action has been given further impetus by political developments, with the new Japanese government redoubling its efforts to revive the economy. A Liberal Democratic Party led coalition won the December election, with new Prime Minister Shinzo Abe calling for 'unlimited easing' from the Bank of Japan.
The central bank increased its asset purchase target by a further 10 trillion yen to 76 trillion yen in December and could ease further at its January meeting. Significantly, media reports suggest the government and Bank of Japan will jointly specify a new 2% inflation target (compared to the current 1% goal), which would point to further central bank easing to come. With the accelerated pace of recent central bank action, the Bank of Japan's balance sheet has expanded to 34% of GDP, and is set to rise further in the coming months.
Further, Bennenbroek feels that complementing these monetary policy moves, fiscal policy has also turned more expansionary. The government has approved 10.3 trillion yen in extra spending on public works, private investment incentives and other measures, spending which equates to some 2.2% of GDP. While economic, monetary and fiscal developments are clearly negative for the Japanese currency, he feels that several factors are tempering his view of how sharply the Yen will decline.
First, with inflation having been absent since the mid 1990s, it's too early at this point to say whether the latest measures will be effective in reflating the economy, an outcome that would increase the chances of a sustained Yen decline. Secondly, Yen positioning is already extended, with speculative Yen shorts more than 80% of their recent December peak. Finally, the Federal Reserve will be easing policy through much of 2013 as well.
Bennenbroek finishes by noting that even as the Yen has slumped since late last year, the movements in US/Japan bond yield spreads have been more modest, especially at the shorter end of the yield curve. Overall he sees potential for corrective yen strength in the near-term, targeting a USDJPY rate of JPY87.00 in next three months, before a gradual weakening of the yen over the longer-term, targeting a rate of JPY90.00 in the next twelve months.
He adds that Yen's decline has been due in part to a softer economy, with Q3 GDP contracting at a 3.5% QoQ annualized pace, and manufacturing and service sector confidence worsening in the Q4 Tankan survey. Those weaker economic trends prompted the Bank of Japan to ease its monetary policy stance, with the central bank increasing its asset purchase target at both its September and October meetings, taking that target from 45 trillion yen to 66 trillion yen.
Bennenbroek feels that the shift towards s increasingly aggressive policy action has been given further impetus by political developments, with the new Japanese government redoubling its efforts to revive the economy. A Liberal Democratic Party led coalition won the December election, with new Prime Minister Shinzo Abe calling for 'unlimited easing' from the Bank of Japan.
The central bank increased its asset purchase target by a further 10 trillion yen to 76 trillion yen in December and could ease further at its January meeting. Significantly, media reports suggest the government and Bank of Japan will jointly specify a new 2% inflation target (compared to the current 1% goal), which would point to further central bank easing to come. With the accelerated pace of recent central bank action, the Bank of Japan's balance sheet has expanded to 34% of GDP, and is set to rise further in the coming months.
Further, Bennenbroek feels that complementing these monetary policy moves, fiscal policy has also turned more expansionary. The government has approved 10.3 trillion yen in extra spending on public works, private investment incentives and other measures, spending which equates to some 2.2% of GDP. While economic, monetary and fiscal developments are clearly negative for the Japanese currency, he feels that several factors are tempering his view of how sharply the Yen will decline.
First, with inflation having been absent since the mid 1990s, it's too early at this point to say whether the latest measures will be effective in reflating the economy, an outcome that would increase the chances of a sustained Yen decline. Secondly, Yen positioning is already extended, with speculative Yen shorts more than 80% of their recent December peak. Finally, the Federal Reserve will be easing policy through much of 2013 as well.
Bennenbroek finishes by noting that even as the Yen has slumped since late last year, the movements in US/Japan bond yield spreads have been more modest, especially at the shorter end of the yield curve. Overall he sees potential for corrective yen strength in the near-term, targeting a USDJPY rate of JPY87.00 in next three months, before a gradual weakening of the yen over the longer-term, targeting a rate of JPY90.00 in the next twelve months.
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