FUNDAMENTAL ANALYSIS


Te Japanese Government is in a fiscal hole and the demographic crunch will intensify from here


Te simplest way to generate growth will be via inflation, hence a weaker Yen is essential


FX


Given Japan’s commitment to Abenomics, what will work best when shortening the Yen?


JAPAN AND A WEAKER YEN


In October 2012, it became clear that the Yen was beginning to weaken. It was as important then as it is now because if Japan is to enjoy any sort of growth, they will need a weaker currency to provide the catalyst and to generate inflation. Tis article will attempt to argue that a weak Yen is both desirable and achievable, in particular against the US Dollar.


Tis time last year, Japanese politicians and central bankers were trying to build a consensus about having a weaker currency. For a long time, there had been a strong view that the Yen had to weaken dramatically for Japan to grow its way out of the intractable problems it is facing - it was only a matter of time before they had to take action.


To put some background in place, the Japanese Government is in a fiscal hole and their overall government debt continues to rise. Coupled to this is a demographic picture that is potentially catastrophic in economic terms. As can be seen in chart 1, the working age population and dependency ratio in Japan is declining alarmingly and is likely to continue that decline beyond the next generation.


FX TRADER MAGAZINE January - March 2014 11


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