FX fundamental analysis
AUD, half of which would USD/JPY (buying). Teir historical low hedge ratios were at 30% back in 2007, a move down to those level would be double the flow above.
Speaking with market players no significant Lifers activity was spotted in the first part of recent USD/JPY rally (up to 82) but more recently, in the 82-84 range, some more relevant (dollar) buying activity was noted. For sure evolution of these flows will be relevant for yen future price action. It is unlikely they will stay still, just watching, especially if JPY keeps weakening.
A weaker currency is not a panacea but it is badly needed
During yen irresistible march toward ever new highs many economists have repeatedly warned us that JPY was overvalued with no success. As it should by now be clear to most of us, any calculation of Purchasing Power Parity and any valuation theory to forecast currencies is of small help in the short, medium and, more oſten than thought, even longer term. Due to Japan’s persistent low inflation, some models suggests
that the yen
is close to a reasonable level. Other models that adjust for productivity rates suggest something closer to an exchange rate of ¥110 against the dollar and ¥130 against the euro would be more sensible. For sure this would put the Japanese economy in a better position to deal with the mounting long term challenges of a shrinking
68 FX TRADER MAGAZINE April - June 2012 Figure 2: Japan: real GDP frowth potential
current account surplus and a much lower growth potential implied from a weak demographic profile.
Real GDP growth has slowed from an average annual rate of 4.4% in the 1980s to 1.5% in the 1990s and just 0.6% in the 2000s. An almost two decades long Richard Koo’s famous ‘balance sheet recession’ has not been the only reason behind it. It was also due to a major demographic shiſt. Japan is ageing more rapidly than any other major economy, savings rate has fallen and Japan’s growth potential has been severely impaired (Figure 2). Te workforce started to decline at the beginning of this millennium, at a 0.3% yearly pace in the 2000s. Latest projections suggest that this rate of decline will accelerate to 0.7% a year this decade and well beyond 1% a year aſter that. Productivity growth is hovering around 1% a year and unless
Source: Bloomberg
the government is going to encourage an unlikely mass immigration this can hardly change. Tat suggests that real GDP growth potential is no more than 0.5% going forward and, with little or no inflation, nominal growth will be nowhere near enough to deliver the stabilization of public debt ratios or increased consumer spending.
With this situation a significant fall in the yen’s real effective exchange rate is probably the most likely vent valve leſt, if not the only one. A weaker JPY is desperately needed in Japan, much more
than a weaker CHF
in Switzerland. Otherwise, as Jim O’Neill, Chairman of Goldman Sachs Asset Management, has put it: “Japan’s ‘happy depression’ of the past 20 years is set to become less happy and more depressed”.
Alessandro Balsotti
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