JPY Update – Forex Trading Tips

The calendar is light today, and being a Friday we will not be overly-eager to risk a reduction in P&L on low probability trades. I prepared the JPY Update in order to keep you up-to-date with the latest changes in the market.

Fundamental Bias: Weak Bearish

Interest Rate

Overnight Target Rate: 0.10%

Last Change: December 19, 2008 (0.30%)

Expected Future Change: Neutral

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

Next Rate Decision: June 19

Inflation

Inflation Target: 2%

Period: Year ending May 28

Tokyo CPI: 0.4%

Tokyo Core CPI: 0.2%

Next Release: June 26

Employment

Month: April

Unemployment Rate: 3.3% Expected: 3.4%

Growth

Period: Q1 (annualised)

GDP: 3.9% Expected: 2.7%

Summary

• Numerical data from Japan is compiled and released by the Statistics Bureau of Japan.

• Nationwide Core CPI from Japan excludes food but includes oil. Core CPI is the BOJ’s preferred measure for tracking underlying price trends and forecasting the future direction of headline inflation.

• Tokyo-area CPI is an advanced reading released near the end of the month which it measures; Nationwide CPI shows the previous month’s data for the whole country – hence there is a one-month lag between the two data points.

• In April 2013 the BOJ launched a program of quantitative and qualitative monetary easing in order to address persistently low inflation. The program primarily involves buying Japanese Government Bonds (JBGs). It was originally intended to increase the monetary base by ¥60-70 trillion yen per annum, but was increased by an additional ¥10-20 trillion yen in October 2014. The aim of the program is to drive inflation back to 2% by around the end of 2016.

• Japan has one the lowest unemployment rates of all the major currency countries.

• The Japanese yen and the Nikkei 225 stock index have a strong negative correlation.

• The Japanese yen is seen as a safe haven currency; the yen appreciates in times of market uncertainty. This is due mainly to Japan being a net foreign asset owner and repatriating funds to hold as local cash when increased risk is perceived. Speculation of yen appreciation during risk-off sentiment further fuels this phenomenon.

• With the exclusion of six months of near-zero positive readings, Japan had deflation from March 2009 until May 2013.

• The Japanese yen has weakened against all its major currency counterparts since speculation of the BOJ’s QQE program emerged near the start of 2012. During that period the currency has depreciated over ¥45 against the dollar, from ¥75 to ¥120 per US dollar.

• The Japanese economy is the third largest single-country economy in the world in terms of GDP.

• Recent annualised GDP figures for Q1, released June 8, showed the economy grew at a faster pace than analysts estimated, at 3.9% versus 2.7%.

Analysis

Due to Japan’s current monetary policy circumstance of extreme easing – with interest rates near zero and massive monthly increases in the money supply – high impact economic indicators which affect other nation’s currency do not have as much affect the yen. Monetary policy in Japan is not expected to be adjusted unless the BOJ witness a confirmed movement in inflation and growth. If inflation moves consistently lower, there will be speculation of the BOJ further accelerating their QQE program. If inflation and growth track higher, as the BOJ intends, then eventually the QQE program will begin to be tapered. Any BOJ rate meetings going forward has the chance to show that some members may be calling for a decrease in asset purchases.

The recent positive reading of GDP has helped dampen speculation of additional easing by the BOJ. Further there is now speculation the at the BOJ meeting on June 19 that there will be hawkish dissenters; some of the members will be voting to decrease the size of QQE.

Economic data, namely Tokyo Core CPI y/y and GDP, should be monitored carefully in the months ahead to glean the chances of the BOJ making calls for lowering bond purchases.

In their most recent statement on monetary policy, released on May 22, the BOJ reiterated their intention to keep the monetary base expanding at an annual pace of about ¥80 trillion. They saw inflation, excluding effects of the sales tax hike, remaining around zero in the near term due to the effects of low energy prices. Although low oil prices pressure inflation, they benefit the Japanese economy in terms of trade as Japan imports over 80% of its energy from foreign countries.

In the press conference following the last statement, Kuroda struck an upbeat tone citing the recent improvement in growth – which stood at 2.4% in annualised terms. The BOJ raised their assessment of the economy and stated that no additional easing is needed at the present time. However should inflation decrease, the BOJ have demonstrated they are committed to reaching the 2% and will implement further measures if necessary.

We look ahead to the BOJ meeting on June 19 for insights regarding future monetary policy.

Overall the yen is weak due to loose monetary policy, but as this has not changed for over 6 months, the current stimulus measures are mostly priced into the yen and as such the currency will generally behave as a weak neutral currency – depreciating against strong currencies, and to a lesser extent, appreciating against weaker ones. Any significant short-term price appreciation in the yen will more than likely be the result of safe-haven flows or speculation of a reduction in QE.

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