FUNDAMENTAL ANALYSIS JPY – Yen
The BoJ puts the rate hike cycle on hold, but the yen should dip back down
FX
At the meeting of 15 March, the BoJ opted not to step up monetary stimulus and leſt unchanged both interest rates (cut into negative territory to -0.10% at the end of January), and the money base growth target.
We have therefore revised upwards our projections for the yen, to USD/ JPY 120-125-122 on a 3m-6m-12m horizon. Te central bank reasserted its expectations for moderate growth, mostly blaming the factors of weakness on the external context. It also intends first to assess the effects of the measures recently introduced, i.e. the cutting of interest rates into negative territory at the end of January.
However, in light of widespread downside risks, the BoJ has leſt its options open to put in place further accommodative measures. Given the prospect of further monetary accommodation by the BoJ, and
of the Fed resuming the rate hike cycle between 2Q and 3Q 2016, we confirm our expectations for a depreciation of the yen by the next few months. In a phase in which the divergence between the BoJ and the Fed is at its height, the exchange rate should return inside the USD/JPY 120-125 range between 2Q and 3Q. Te USD/JPY 125 mark was the low hit by the yen last year, and is the closest it has been to the long- term low hit in 2002 at USD/JPY 135.
While we cannot rule out a descent of the Japanese currency to beyond last year’s lows, to within the USD/ JPY 125-130 range against the dollar, our baseline scenario assumes limited downside, for several reasons:
(1) Te BoJ’s margin for further
monetary stimulus is limited, and given the current terms of QQE, and the level of interest rates, the marginal
effectiveness of additional actions is lower;
(2) At like-for-like monetary stimulus injected, the yen is much more reactive to the BoJ’s actions than to the Fed’s;
(3) At least part of the monetary stimulus held back may be balanced by
fiscal policy, with a
new package of accommodative measures (in the next few months, the consumption tax hike planned in 2017 may also be postponed);
(4) The yen has appreciated significantly in the past few years, and the nominal effective exchange rate is close to its long-term highs (Fig. 1);
(5) Te current balance of the balance of payments has returned well
into
positive territory (around 3% as a percentage of GDP);
FX TRADER MAGAZINE April - June 2016 11
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