Yen Policy or Shadows on the Rising Sun

April games with tax rate increase have still produced negative effect: last month, retail sales went down by 0.5%; however, the information regarding payment balance (without seasonal fluctuations) published this morning produced the result of 0.963T against 0.534T as predicted
The historical moment of FRS ending the last QE round, instead of quiet analysis of lessons learnt from that experiment, brought a new economic abnormality to the currency market - the program of asset-purchase expansion by the Bank of Japan. It is difficult to live in the time of revolutions, but the most difficult thing begins when this revolution is over. The closing of American QE program produced more of a psychological effect, since it is clear that the US economy still needs financial injections, and the regulator's new steps are expected. Japan took its choice in favor of the American scheme of economy adjustment as fast as one day after the Federal Reserve's decision. Objectively, the national economy did not need such measures, it could regulate the problem of inflation by the old methods; however, an active destruction of the buying power of the Japanese currency began. Possibly, such a decision was previously coordinated between BPJ and FRS.

The first task, in the light of the program that opened was not allowing large sellouts of assets from risk zone and introduction of mechanisms of global growth rate decrease. Judging from how the stock market, practically, did not respond to the closing of QE, its participants are absolutely confident that there is no need to sell stocks - the stream of cheap money to the global market will not stop; just the provider will change: reinvestment of profit from American papers kept on the FRS balance (approximately, 4.5 trn dollars), as well as issuance receipts from quantitative easing zones will become the replacement for straight purchase. Therefore, the second goal of the Japanese program results from the ECB's inability to provide the inflow of fresh liquidity to the common market. The process of national debt and Eurozone non-state papers purchase that was launched is still ineffective, and in case of inflation growth, it can be completely stopped. The results of European efforts can be evaluated only in 3-4 months. During this period, something had to replace FRS in order not to disrupt the market, and this role of liquidity provider was temporarily filled by the Bank of Japan. Rational Japanese also organized solving of the internal problems and reformatting of the largest global Government Pension Investment Fund GPIF under the announced program of asset buyout. In order not to miss massive sellout of Japanese treasury papers (since other investment funds could follow GPIF), the regulator made a dramatic increase of the limit of the centralized buyout of state bonds.

All these measures are difficult to see as the methods of economic stimulation; moreover, in similar situations, the global tendency of monetary policy replacement with fiscal policy is observed. The measures that are taken are, most likely, of technical character, and that means that the Central Bank, in 3-6 months, will have to turn around and wait for a reduction of purchases. The moment of this reverse will be determined by inflation dynamics and by the speed of purchased asset "relocation" (qualitatively, accumulation must be replaced by distribution).

Asian retail players don't play against fundamental factors any more, they don't have a serious superiority over hedge-funds, and the situation is practically neutral, according to the volumes. April games with tax rate increase have still produced negative effect: last month, retail sales went down by 0.5%; however, the information regarding payment balance (without seasonal fluctuations) published this morning produced the result of 0.963T against 0.534T as predicted. The inflation surge can be expected by the end of the current year. The Japanese stock market is quite overheated now, which is not good; we can hardly expect the growth of 10% planned by the Bank of Japan from the main driver of the Japanese stock market - Nikkei Index.

Despite the fact that the stimuli announced by the Bank of Japan have already pushed USD/JPY from 108 to 115 figure, the pair, against the background of dramatic oversold condition is in adjustment now; however, it will keep on getting weaker. At the same time, GPIF reinvestments have already caused streams of capital against the fall of yen; however, upward endurance can be evaluated as 300-500 points until the end of the first quarter. The mid-range goal is 115.50-116.30. Sales on pullbacks can also be very profitable.

Author: Navsher Bartash,
ForexChief Currency strategist