Japan: Dealing with Abe’s broken arrows - Westpac

Sean Callow, Senior Currency Strategist at Westpac, suggests that the Bank of Japan has now delivered three of its quarterly outlooks for 2016 and USD/JPY has emerged significantly lower from all three.

Key Quotes

“Indeed JPY’s 19% gain so far this year dwarfs the second-strongest G10 currency against USD, CAD on 6%. This is despite the BoJ having eased policy at 2 of the 3 key meetings. In the BoJ’s defence, they consistently argue that any yen depreciation that accompanies monetary loosening is incidental. Japanese government bond yields fell heavily for much of this year. Even after the nasty jump in yields since Friday’s BoJ meeting, the 10 year JGB yield is still down from 0.23% before the Jan meeting (where negative interest rates on bank reserves were surprisingly announced) to -0.08% today.

Yet the surge in the yen obviously works powerfully against the BoJ’s attempt to reach its 2% inflation target, deep into Governor Kuroda’s 4th year in charge. Aside from disappointment that the BoJ only delivered one of the various options markets had hoped for (boosting equity ETF purchases), there was unease over the plan to “conduct a comprehensive assessment” of the impact of current policy settings, to be revealed at the Sep meeting.

Markets will be skittish about this review, fearing admission that monetary policy is not achieving its goals. Meanwhile, PM Abe’s much hyped fiscal package was received coolly. Abe’s 3 ”arrows” of monetary easing, fiscal stimulus and structural reform are looking rather blunt.

Speculators have been short USD/JPY for many months. This stance was reinforced by the soft US Q2 GDP data, which has seen pricing for another Fed rate hike pushed back yet again. This seems likely to persist near term, not only capping USD/JPY but leaving AUD/USD well supported despite the RBA rate cut.”