Japan: New Sakura and Economic Metamorphoses

This week's publication of American labor market March statistics may drop yen to the level of key support 118.00-118.20
Yen continues to grow against dollar. It can be explained by a number of factors - weakening of dollar, fall of oil prices, ending of the financial year, finally, by tradition. However, externally, the situation with yen does not dispose to that. Regarding dollar, it is clear that the terms of raising rates move to vague future in fall, and as for yen... If we are to make a comparison with the last year, it seemed to have been the growth of consumer prices; however, point estimation revolves around zero, anyway. Nevertheless, the signs of broad hints show the replacement of aggressive policy with regard to pumping up the market with cheap yen towards optimal distribution of liquidity streams. Kuroda has been avoiding straight analysis of statistics and softly stated that purchasing of assets brings positive changes, and the weakness of the Japanese policy in the matters of inflation increase is explained by the fall of prices for energy resources. No one is even thinking about stopping the stimulation program. Now, the volume is estimated as 80-85 trn yen annually, and exiting the program will not be on the agenda for at least two more years.

In fact, the Bank of Japan has not yet arrived at anything progressive in the QE issue except unclear games played by the Pension Fund with Nikkei papers overvalued to new heights, growth of asset inflation and accumulation of astronomic amounts of cash (around 2 trn or 16.8 bln dollars per month). At the same time, the last factor, in principle, is characteristic of all countries that use quantitative stimulation techniques. "Lazy" money cause such serious discomfort that the government is ready to make corporations spend record-breaking reserves of cash for raising salaries and for capital expenses even by way of "double" taxation of profit. That is exactly the indicator of the fact that huge amounts of money printed by the Bank of Japan do not work, and if the accumulated funds are forced to circulation, the effect will hardly satisfy the exhausted economy.

Last week, the Japanese statistics showed zero annual inflation (without taking into consideration the effect of another increase of sales tax). Steadily falling expenses of Japanese households (-2.9% in February) obviously point out to consumers' uncertainty regarding the future and the fear of a new round of crisis. That is why the Bank of Japan, on the one hand, holds wait-and-see position, trying to assess the effect of falling oil prices on consumer prices, and, at the same time, weak statistics, in itself, puts pressure on the regulator in order to increase the volume of monetary stimulation of economy, otherwise the target level of 2% inflation will turn out to be not quite transparent. Before the planned negotiations between the "Big Six" and Iran, oil quotes made several attempts to go downwards, which turned out to be quite a favorable factor for yen exchange rate. It grew stronger against the G10 competitors not paying attention to yesterday's negative industrial production data for February, although the value fell by 3.4% (last month, there was 3.7% growth). All last week, yen was purchased as safe haven currency. We should expect further growth of long positions in USD/JPY pair, as well as in major Japanese stocks. That is not for the sake of supporting US dollar, it is exceptionally because of current factors that are specific for Japan:

  • Chronic undervaluation of BOJ stimulation increase risk by the market;
  • Speculative constraining of short positions accumulation process by exporters;
  • "Repatriation" of profit made by Japanese companies that will need national currency;
  • The beginning of the financial year (April 1) - investors guarantee traditional demand for foreign securities at this time.
This week's publication of American labor market March statistics may drop yen to the level of key support 118.00-118.20; besides that, hardly anything can disappoint JPY "bulls". Large exporters' orders that will try to keep the rate in the zone of 120.00/50 are near 120.00. Hence, 121.00 – 121.50 – 122.20 can be considered as growth targets. Anyway, even in case of pullbacks, presently, USD/JPY sale orders are not relevant at all - only upward motion is expected.

Author: Navsher Bartash,
ForexChief Currency strategist