Japanese Motifs or Who Needs Zero Capital Today

The value of the Japanese capital, both on domestic and on foreign market is going to zero
While the purchase of European assets is discussed on the markets with the careful positive, yen's new nervous response to American reports brings doubts again as to the effectiveness of such policy for Japan. The Japanese model of economic growth has never placed stakes on consumption, and, for many years, has thrived at the expense of exports, low wages, and low income from private savings. National manufacturers sold their products abroad at prices lower than to the domestic market receiving multi-billion subsidies for that. However, national exports have long lost this battle to China that saves, first of all, on the increase of production volumes.

The value of the Japanese capital, both on domestic and on foreign market is going to zero. Neither corporations nor private investors want to see the benefits of low rates, and not even the slowest growth of investments against the background of cut down of spendings has been observed for a long time. Devaluation of currency and tax feeding of corporations at the expense of households instead of real measures for domestic demand stimulation lead to impoverishment (dying out) of the private sector of the economy.

Today, when yen is so weak, only a dedicated philanthropist or a kamikaze can buy Japanese bonds (profitability 0.01-0.03%) or 10-year papers (0.22-0.24%), although these particular assets serve as the basis for assessment of inflation expectations and are continually monitored by the Central Bank. Index papers are still of some interest for private investments, although their profitability is neutralized by constant demand on the part of BOJ and other agencies controlled by it. No one will seriously buy "empty" stocks only because the government allocates money for that.

Several reasons for strengthening yen are being considered:

  • Japanese CPI is slowing down significantly, and all the guilt for the negative is shifted to the fall of prices for energy resources. Against this background, support of USD/JPY can be provided at the expense of fall of capitalization of American oil companies in the USA and stock market adjustment;
  • If yen is perceived as a historically reliable protective asset, then it must grow faster than US dollar;
  • If the market interest goes into risk zone (for example, goes to euro or yuan), yen must also grow against the background of dollar rate decrease;
  • Easing of BOJ representatives' statements add to the confidence that the national experiment with QE is not infinite, and the reductions of purchases are possible as early as in the first half of 2015, which can also give yen a good push for growth.
The growth of industrial production in December - 1% can be seen as the main factor of structural recovery, which provides significant GDP growth, i.e. additional jobs and new consumers. And - a plus to inflation. However, reaching the goal of 2% inflation this year is being actively imposed on analysts as an imminent victory, although morning indicators of business activity indexes brought disappointment, and the information regarding the balance of payment, in general, cause mistrust against the background of reduction of gold and currency reserves. Stimulation of inflation instead of economy development seems to be going on, however, certain attempts to set some boundaries are made. The logic of the Bank of Japan's further policy is not transparent yet. The current results seem to be negative to the world, and the comments made by the Japanese officials are targeted at persuading everybody in the opposite. Nevertheless, the policy for saving the economy at the expense of devaluation is the main method of the local QE, while expecting the continuation of WTI and Brent downward movement, which will push the growth of consumer prices to zero, and slowing down of inflation gives rise to new stimulation measures.

Large stops above 119.00 have been passed, the current adjustment has been practically used. Accumulation of purchase orders is observed in the area of 118.90 - 119.40. Overbought is still there, and 118.00 - 188.11 is yet to be tested once and again. Taking into consideration Japan's current policy and FRS sentiments, USD/JPY pair, in the mid-term, will be positive, there is not yet any reason for the continuation of active growth, however, bullish control remains.

Author: Navsher Bartash,
ForexChief Currency strategist