The Japanese yen is the third-most traded currency in the world, according to a recent survey by the Bank for International Settlements. Specifically, the currency is involved in 11% of all foreign exchange trading. The yen is also unique as it is considered a safe haven asset - the currency strengthens during times of peril and weakens during strong economic booms.
The Japanese yen continues to strengthen today, particularly against the US dollar. As a safe haven currency, the yen tends to weaken when global growth is accelerating and strengthens during downturns. While the yen began rising following fears of an extended stock market rout, the currency continues to strengthen despite a rebound in most global stock markets. Looking at Japanese domestic data, weak quarterly GDP growth figures and falling machinery exports helped yen strength this week. Turning to monetary policy, the current Bank of Japan Governor Haruhiko Kuroda was appointed for a rare second term, despite his age (73). Kuroda was appointed alongside deputies including BoJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe. Both are well-known for their pro-monetary easing views. Unfortunately for the yen, this isn't enough to change the course of the currency as it continues to strengthen. Our short-term and medium-term outlook on the yen remains bullish.
USD/JPY is currently trading above 105.80. EUR/JPY is currently flat and trading above 132.70.
Looking at Japanese economic data, traders will be focused on upcoming GDP figures. Annualized QoQ GDP growth numbers (0.5% vs. 0.9% expected) widely missed estimates. Machinery orders (-5% vs. 2.2% expected) missed expectations by a very wide margin due to falling exports. Industrial output (2.9% vs. 0.5% prior) was higher than previous figures. Cross-border stock (-¥429.5b) and bond (-¥973.2b) investments continue to suggest capital inflows into the country. Last week, cross-border figures also showed that capital was flowing into Japan (strengthening the yen).
As the yen strengthens, we are upgrading the yen to bullish in the short-term. Note that the currency is looking overbought, based on technical indicators on the daily chart.
As the yen strengthens, we are upgrading the yen to neutral. Looking at the yen on a weekly chart, the currency is trading within normal conditions. This is based on various technical indicators when looking at a weekly chart.
Policy: The Bank of Japan's monetary policies remain fairly loose, and 'yield curve control' (holding 10-year Japanese government bond yields at 0% through buying and selling bonds) remains in place. In recent history, the BoJ stopped buying long-dated government bonds, which has been interpreted by markets as a hawkish shift in policy. In our view, the BoJ remains among the most dovish central banks, and a hawkish shift is unlikely in the near-term. Looking at fiscal policy, the re-election of Abe is likely to result in additional fiscal stimulus over his term. Prior to the elections last October, he promised a substantial fiscal stimulus program focused on child care and education.
Sentiment: Looking at the Commitments of Traders Report, speculators remain short the Japanese yen. Thanks to strong global growth, speculators believe that the yen is likely to remain weak as the economic environment remains "risk on". When sentiment approaches bearish extremes, the Japanese yen tends to rebound in response. If global bond yields fall in 2018 (as a result of weakening inflation), there is a risk that the yen begins strengthening.
Economic data: The Japanese economy has registered surprisingly good rates of growth since the end of 2016. Annualized growth rates have increased from 1.6% in Q4 2016 to 2%+ thanks to a rebound in global growth as well as a fiscal stimulus program enacted in October 2016. Unfortunately, the country remains susceptible to deflation, with annualized inflation figures remaining substantially under the BoJ's 2% target since 2015. Thus the impact from growth and inflation is mixed.
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Japan has suffered from weak growth and inflation since the global financial crisis, and the Bank of Japan has frequently experimented with unorthodox monetary policies. In September 2016, the BoJ decided to directly target long-term interest rates. The so-called “yield curve control” (YCC) program fixed 10-year Japanese government bond (JGB) yields at 0%. If yields deviated from the BoJ’s target…
As the Bank of Japan is one of the world’s most dovish central banks, market expectations for this week’s upcoming event are very limited. Governor Haruhiko Kuroda, who has overseen a $4T quantitative easing program and negative interest rates over his 5-year term at the Bank, is an unlikely candidate to bring about hawkish monetary policies. This is especially the case as domestic inflation rema…