FUNDAMENTAL ANALYSIS
FX
It will be difficult to claim any major wins on the structural reform front for a long time simply because the results take a long time to appear. Fiscal consolidation will be extremely difficult to achieve simply because the problem is so large. We fear that changes here will be little more than symbolic for the time being. So that leaves money printing.
Chart 3: (Reference 2) General Government Gross Debt (International Comparison)
Abe was elected in December 2012 promising dramatic change and the yen weakened substantially until this past spring. Since then, both the currency and the equity market have gone into hibernation until the last few weeks. Te Yen is beginning to weaken again and the equity market is breaking higher. It is important to associate a weak currency with a higher Japanese equity market. Both are inter-dependent and mean that one will lead to the other.
So why should the Yen begin to weaken again now? The answer lies in the policies that Prime Minster Abe has identified. Abenomics is about “three arrows” which are essentially;
1. Monetary stimulus via Quantitative Easing. 2. Fiscal consolidation to tackle the unsustainable Government debt position. 3. Structural reform.
In April this year, the Bank of Japan announced “shock and awe” tactics in the scale of quantitative easing they were planning. Tey announced that they would double the monetary base within two years. Relative to the size of the economy, the programme is about three times larger than the current US Federal Reserve QE policy. As with the US, the aim is twofold; to force investors out of safe, low yielding cash, and into riskier assets such as Japanese equities and overseas assets as well as weakening the currency to generate growth and, in turn, inflation.
We really should not underestimate the reality that the Japanese authorities are almost totally dependent on Yen depreciation to generate
economic
growth and higher asset prices. Tey may try and hide behind quantitative easing being purely a domestic policy, but a weak Yen is a target of the authorities.
Chart 4: Japanese Yen Spot - Monthly chart
Tis is the crucial point to remember when thinking longer term or when seeking structural, secular trades in foreign exchange. A one off 25% currency move is simply not enough for Japan to generate the lasting
FX TRADER MAGAZINE January - March 2014 13
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