Forex Flash: Yen ending 2012 on a weak footing – BTMU
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USD/JPY
FXstreet.com (Barcelona) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen remains on the defensive heading into year end with the BoJ's nomial trade weighted Yen index having declined to its lowest level since May 2010 over the Christmas holiday period.
He feels that 2012 has proved to be a key turning point for the Yen with the BoJ's nominal trade weighted Yen index having declined by some 14%, its first annual decline since 2009 during the initial recovery phase from the global financial crisis. He believes that this is likely to bring an end to the five year trend which had been in place since 2007, prior to the global financial crisis.
Of the 32 expanded major currencies tracked by Bloomberg, the yen was the second worst performing currency in 2012 with the Argentine peso the only currency that performed worse than the yen where inflation is unofficially running at around 25.0% eroding the peso's purchasing power. He notes that it is the yen's weakest annual performance since 2001 with its annual percentage decline exceeding those recorded during the build up of the global yen funded carry trades in 2005 and 2006. Yen weakness during the early 2000's also coincided with an aggressive expansion of the Japan's monetary base with the annual percentage change rising from a low of -5.4% in January 2001 to a peak of just over 36.0% in April 2002.
Hardman comments that a broken monetary mechanism resulting from private sector deleveraging lead to a more limited pick up in broad money supply growth with the annual rate increasing from 2.3% to just 3.7% over the same period. He comments that bank lending growth during this period remained deeply negative running at annual rates between -3.0% and -5.0% with limited pass through to the real economy as the BoJ's aggressive monetary easing failed to defeat deflation.
With annual bank lending growth currently expanding modestly at just over 1.0%, initial conditions appear more favourable that the BoJ's current planned aggressive expansion of its monetary base in 2013 may have greater pass through to the real economy. To sustain a weaker yen it will likely require retaining investor confidence that higher inflation will emerge lifting inflation expectations in advance helping to lower real rates on offer in Japan given that real rates on offer in most other advanced economies are likely to remain firmly in negative territory in 2013.
He finishes by writing, "So far so good the market is convinced by the planned action of the BoJ and hints at more to come which provided a Christmas present to the Japanese authorities with USDJPY rising back into the 85.00-90.00 range. LDP Secretary General Ishiba has suggested that it is a more "adequate" range while noting it will take more policy measures to maintain. New Finance Minister Aso has also stated that they do not seek drastic fall in the yen, while sending a warning shot to other G7 members by stating that other nations have no right to lecture Japan on currency policy indirectly blaming loose Fed policy for the weak US dollar."
He feels that 2012 has proved to be a key turning point for the Yen with the BoJ's nominal trade weighted Yen index having declined by some 14%, its first annual decline since 2009 during the initial recovery phase from the global financial crisis. He believes that this is likely to bring an end to the five year trend which had been in place since 2007, prior to the global financial crisis.
Of the 32 expanded major currencies tracked by Bloomberg, the yen was the second worst performing currency in 2012 with the Argentine peso the only currency that performed worse than the yen where inflation is unofficially running at around 25.0% eroding the peso's purchasing power. He notes that it is the yen's weakest annual performance since 2001 with its annual percentage decline exceeding those recorded during the build up of the global yen funded carry trades in 2005 and 2006. Yen weakness during the early 2000's also coincided with an aggressive expansion of the Japan's monetary base with the annual percentage change rising from a low of -5.4% in January 2001 to a peak of just over 36.0% in April 2002.
Hardman comments that a broken monetary mechanism resulting from private sector deleveraging lead to a more limited pick up in broad money supply growth with the annual rate increasing from 2.3% to just 3.7% over the same period. He comments that bank lending growth during this period remained deeply negative running at annual rates between -3.0% and -5.0% with limited pass through to the real economy as the BoJ's aggressive monetary easing failed to defeat deflation.
With annual bank lending growth currently expanding modestly at just over 1.0%, initial conditions appear more favourable that the BoJ's current planned aggressive expansion of its monetary base in 2013 may have greater pass through to the real economy. To sustain a weaker yen it will likely require retaining investor confidence that higher inflation will emerge lifting inflation expectations in advance helping to lower real rates on offer in Japan given that real rates on offer in most other advanced economies are likely to remain firmly in negative territory in 2013.
He finishes by writing, "So far so good the market is convinced by the planned action of the BoJ and hints at more to come which provided a Christmas present to the Japanese authorities with USDJPY rising back into the 85.00-90.00 range. LDP Secretary General Ishiba has suggested that it is a more "adequate" range while noting it will take more policy measures to maintain. New Finance Minister Aso has also stated that they do not seek drastic fall in the yen, while sending a warning shot to other G7 members by stating that other nations have no right to lecture Japan on currency policy indirectly blaming loose Fed policy for the weak US dollar."
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