JPY Update 20th of October

The yen rallied in late august as risk-off sentiment emerged in relation to the Chinese slowdown and stockmarket sell-offs. Throughout September the yen remained strong and, despite its fundamental weakness, failed to depreciate back to pre-August levels. The yen will need either a dose of risk-appetite or further easing by the BOJ to see the currency resume its course of depreciation.

JPY Update:

Interest Rate

Overnight Target Rate: 0.10%

Last Change: December 19, 2008 (0.30%)

Expected Future Change: There is a slight possibility of increasing the QQE program

Quantitative Easing: ¥80 trillion (~$670 billion) per annum

Next Rate Decision: October 30

Inflation

Inflation Target: 2%

Period: Year ending September 30

Tokyo CPI (All Items): -0.1%

Tokyo CPI (Ex-Food & Energy): 0.6%

Next Release: October 29

Employment

Period: August

Unemployment Rate: 3.4% Expected: 3.3%

Next Release: October 29

Growth

Period: Q2 (annualised)

Final GDP: -1.2% Expected: -1.8%

Next Release: November 11 (Preliminary GDP Q3)

Analysis

The most recent statement on monetary policy, released October 7, cIn its statement, the monetary policy board said that the economy continued to recover moderately and was likely to continue doing so. The MPB said that the core CPI was likely to continue to be about zero for now due to the decline in energy prices. However, both exports and output have been affected by the slowdown in the emerging markets. It noted that private consumption has been resilient but capex remains weak. Again, the Bank refrained from alluding to any increase of bond buying, however if inflation does not pick up in the months ahead then the market will place more emphasis on the chance of the BOJ increasing the monetary base further. The prospect of further easing became more apparent when, on September 10, lawmaker and Abe-adviser, Yamamoto, stated that the BOJ needs to increase asset purchases by at least ¥10 trillion per annum and that the October 30 meeting would be an ideal opportunity to make such an announcement. The market will be monitoring the upcoming meetings closely.

Final GDP for the second quarter, released September 8, was revised slightly higher to -0.3% from -0.4%. Although a positive revision, and better than expectations, this still equates to a contraction of 1.2% in annualised terms. This shows the BOJ that the economy is still yet to see any meaningful effects from QEE. The BOJ for months has been adamant that the poor economy data will soon pick up, however this is yet to materialise; it’s becoming difficult to say that Japan is in a recovery. This poor GDP print along with the Chinese devaluation, which puts deflationary pressures on Japanese imports, adds weight to the case that the BOJ will ease policy further.

In July, the BOJ for the first time began focusing more on CPI excluding both fresh food and energy at its preferred gauge of underlying inflation. The traditional ‘core’ CPI readings previously only had fresh food stripped out. By focusing on price changes minus the downward pressure of the oil, the BOJ suddenly becomes a lot closer to their inflation target of 2%.

On October 16 we heard comments from the BOJ’s Kuroda. He said Japan’s exports and output are slowing, but trend for consumer prices is improving. He also said the BOJ expects consumer prices to reach the 2% inflation target as the impact from oil prices fades, and that the central bank will analyze upside and downside risks, and adjust monetary policy if needed. Otherwise, he gave no indication of whether or not the central bank had any plans for additional easing.

Although a weak currency in the longer-term, due to the QQE program, the yen trade in line with risk sentiment and global equities markets with the China slowdown continuing to create market uncertainty. We can look to buy the yen if stockmarkets weaken rapidly during any given session. Conversely, any future hints or announcements that the BOJ will increase their current bond-buying program will see the yen depreciate.

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