FX fundamental analysis
the oil price keeps rising towards $150/ bbl without any notable acceleration in global growth”.
Te main driver of the impressive JPY strength in the last few years has been twofold, in my view: a significant
current account surplus
and the unwinding of a massive carry- trade (mostly domestically owned, but not exclusively) triggered by the financial crisis and the correlated fear and deleveraging. Let’s focus here on the first. Te current account effect now is weakening, via the worsening of the trade balance component. It may be not enough as a source of permanent yen weakness since the capital account component is still solid, Nomura suggests. Te two most important variables able to change this central forecast are oil price and global growth.
Te recent deterioration in Japan’s trade balance had several reasons but the most important of these has been the deterioration in terms of trade (export price/import price) linked to increases in mineral fuel prices. If we exclude the mineral fuels trade balance, the deterioration in the trade balance was more moderate. Although the total trade balance deteriorated by 1.9% of nominal GDP last year, more than half of the deterioration (1.0%) came from the mineral fuel trade. Moreover, the clear downtrend in the trade balance since 2000 disappears when mineral fuels are excluded (Figure 1). Tat is why oil price is the first thing to look at trying to forecast future structural flows regarding Japan external balances.
66 FX TRADER MAGAZINE April - June 2012
Figure 1: Japanese trade balance (per nominal GDP)
While the main reason behind the recent deterioration in the trade balance is the change in mineral fuel prices, part of decline in the non- mineral fuel trade surplus from 5.8% of GDP in 2007 to 3.8% of GDP in 2011 may be explained by JPY appreciation and lower growth outside Japan. Te period covered by the gradual increase in the trade surplus until 2007 was associated with a high global growth rate, especially in EM countries. Te sharp decline in growth outside Japan
USD EUR AUD GBP Total
1,091 8,199
Daiichi 2,609 1,256 267 200
4,332
Source: Bloomberg
in 2008 and 2009 led to a sudden decline in Japanese exports (especially machinery exports) and, as a result, the trade surplus shrank significantly. It is interesting to note how a slowdown in global growth, especially if serious enough to trigger a recession or even only a recession-scare, has been in the last few years associated with a stronger yen: a safe-haven currency responding to a risk-off environment. Te main reason behind that was, as mentioned before, a knee-jerk reaction triggering
Foreign ccy asset (Bonds + Stock + Loan and others) Nissay 5,261 1,247 600
2,288 (unit: Yen billion)
Sumitomo Meiji Yasuda Mitsui 832 879 513 64
2,011 279 123 0
2,413
344 212 0 0
556 Sep-11
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