Download FX FOCUS Japanese yen

Helaba Research
FX FOCUS
31 January 2014
Japanese yen
AUTHOR
Christian Apelt, CFA
phone: +49 69/91 32-47 26
[email protected]
EDITOR:
Claudia Windt


PUBLISHER:
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
Helaba
Landesbank
Hessen-Thüringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69/91 32-20 24
fax: +49 69/91 32-22 44

The Japanese yen appreciated noticeably this year, also the US dollar and the pound
sterling gained against the euro. Along with the Canadian dollar, a few emerging market
currencies came under pressure, in some cases considerably pressure.
After the massive losses of last year, the yen is recovering. The Japanese currency is
benefiting once again from a higher aversion to risk. In spite of the still very aggressive
monetary policy in Japan, the yen, because it is undervalued, has recovery potential,
especially against the euro. However, the long-term outlook for the yen is afflicted with
uncertainties.
Helaba Currency Forecast
Euro performance on a month-over-month basis
% vs. euro compared to the previous month (from 12/31/13 to 01/30/14)
US dollar
1,4
4,0
1,0
British pound
Swiss franc
0,3
Canadian dollar
-3,5
Australian dollar
0,0
0,8
New Zealand dollar
Swedish krona
0,2
Norwegian krone
-1,5
Czech koruna
-1,0
Polish zloty
-1,8
Hungarian forint
-4,0
This publication was very
carefully researched and
prepared.
However,
it
contains
analyses
and
forecasts regarding current
and future market conditions
that are for informational
purposes only. The data is
based on sources that we
consider reliable, though we
cannot
assume
any
responsibility for the sources
being accurate, complete,
and
up-to-date.
All
statements in this publication
are
for
informational
purposes. They must not be
taken as an offer or
recommendation
for
investment decisions.
Japanese yen
-4,1
Russian ruble
-4,1
Turkish new lira
South Korean won
-1,8
1,1
-0,1
Chinese yuan
Indian rupee
South African rand
-5,1
-0,7
-1,1
Brazilian real
Mexican peso
■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets
Sources: Bloomberg, Helaba Research
HELABA RESEARCH 31 JANUARY 2014· © HELABA
1
FX FOCUS JAPANESE YEN
JPY: there’s life in the old dog yet
Massive yen depreciation
in 2013
The general prospects for the Japanese yen are mostly seen as negative. Already in 2013, the yen
was the weakest currency among industrialized countries. The Japanese currency lost more than
20 % against the euro. The decline of 17.6 % against the US dollar was the second-highest loss in
the last forty years. Since the beginning of this year, however, the yen has surprisingly turned out
to be the strongest currency.
The sharp decline of the yen began already in the fall of 2012 in the run-up to the change of
government in Japan. In response to pressure from the new Prime Minister, Shinzo Abe, Japan’s
central bank embarked on a noticeably more expansionary course of monetary policy. The Bank of
Japan (BoJ) is now in vigorous pursuit of an inflation target of 2 %. To that end, it is buying assets,
primarily government bonds, in order to double its monetary base within a period of just under two
years. This “yen flood” led to a politically desired depreciation of the currency and to low bond
yields, whereby the extent of the yen’s losses may have surprised even the politicians.
Real yen index at 30-year low
Yen-depreciation against euro exaggerated
Index (trade-weighted)
JPY
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
Yen by now undervalued
% points
During the global financial crisis, the yen, as a low-yielding currency and safe investment haven,
appreciated and was considered overvalued on the basis of various indicators. With the losses, the
picture has reversed: Thus, on the basis of real exchange rate indexes the yen is at a very low
level. Purchasing power parities also point to an undervaluation of the yen, especially against the
euro. The shorter-term interest rate differentials in the capital market also do not buttress the
weakness against the euro and the US dollar. Only the long-term yield differences vis-à-vis the US
dollar fit the higher dollar-yen exchange rate. In fundamental terms the yen seems to have
overshot on the downside – a situation that is not rare in the currency market, however, and which
is not always quickly corrected.
The state of Japan’s economy has improved markedly since Abe came to power. GDP probably
grew by right around 2 % in 2013, and the individual quarters by even more than 3 % in terms of
an annualized average. In addition to the expansionary monetary policy, the economy was helped
above all by the programs of government spending. When it comes to businesses, not only did the
sentiment improve noticeably, but investments were also noticeably higher. Private consumer
spending also improved. Foreign trade, of all places, provided few positive impulses on balance.
Although exports climbed nominally by almost 10 % on average for the year, that is explained by
the yen depreciation and the higher revenues connected with it. The actual export volume in fact
shrunk. In addition, the volume of imports expanded, since Japan had to import more energy
products following the shutdown of all the nuclear power plants. With that, the trade balance ran a
record deficit, and in the current account the surplus shrank accordingly, in fact most recently there
was even a deficit. In general, exchange rate devaluations affect foreign trade only with a time lag.
As a result, exports should at least ensure certain positive effects in 2014. The increase in the VAT
from 5 % to 8 % will undoubtedly dampen consumer spending. Whether the willingness of
HELABA RESEARCH · 31 JANUARY 2014 · © HELABA
2
FX FOCUS JAPANESE YEN
businesses to invest will increase in a sustained way is questionable. Thus, economic growth in
Japan will presumably slow a little this year.
The BoJ has come closer to the official goal of higher inflation. Thus, the overall rate stood most
recently at 1.6 %, even if the core rate (minus energy and food) is much lower at 0.7 %. The higher
inflation is mostly due to higher import prices resulting from the exchange rate. The increase in the
VAT is likely to trigger another price boost. However, in the face of wages that continue to stagnate
it is questionably how long this inflationary process will last.
Long-term risks for
the yen
Given the high national debt of 230 % of GDP, a higher inflation is very much in the interest of
Japanese politics, at least as long as capital market interest rates remain very low. Most
government bonds are held by domestic investors. The lower current account surplus and the
declining savings by private households bear long-term risks as to whether the capital market
interest rate will remain so low. After the hike in the VAT, the government budget deficit will still be
at more than 7 % of GDP. And there is also a question mark as to whether the third pillar, structural
reforms, will be seriously pursued within the framework of “Abenomics” alongside monetary and
fiscal policy. So far there have been only modest approaches, as for example the efforts for an
international free trade agreement. Long term, the economic and fiscal prospects for Japan should
be looked at sceptically.
Trade and current account balance worsen
Massive bets against the yen as contra indicator
Net in % of GDP
Contracts in % of Open interest
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
Chances of recovery
especially against the euro
JPY
Although a sustained inflationary process in Japan would ease the debt problem, for the yen such
a development would be very negative. Because of the special effects, it is likely that no verdict
about this is possible this year. Monetary policy will presumably continue its expansionary course;
in fact, the BoJ might even expand its purchases slightly in the wake of the hike in the VAT. But
this aggressive monetary policy has been sufficiently played out in the currency market. As
mentioned before, most valuation indicators point to an exaggerated yen weakness. The very onesided positioning against the yen in the futures markets can thus be taken more as a contra
indicator. The yen recovery since the beginning of the year is therefore not really surprising. For
the short-term development, however, the general penchant for risk in the financial markets plays a
crucial role. Last year, especially, it is likely that many risky investments – by foreigners or
Japanese – were financed in yen. The sale of these positions, as currently from emerging
countries, strengthens the yen. The year 2014 will presumably be much bumpier in the capital
markets than 2013, and the Japanese currency should benefit from this over stretches – especially
against the euro. Yet the longer-term prospects for the yen are anything but rosy. However, the
current undervaluation should stabilize the yen at least in the coming months. And since the
misvaluation is even more pronounced against the euro, there is even recovery potential here. As
a result, the euro-yen exchange rate should drop from currently 139 in the direction of 130. The
dollar-yen exchange rate will hover around the current level of 102 for the time being.
HELABA RESEARCH · 31 JANUARY 2014 · © HELABA
3
FX FOCUS JAPANESE YEN
Helaba Currency Forecasts
Performance
year to date 1 month
vs. Euro
current*
Forecast horizon at end ...
Q1/2014
Q2/2014
Q3/2014
Q4/2014
(vs. Euro, %)
US dollar
1,4
1,4
Japanese yen
4,0
4,0
139
132
132
128
126
British pound
1,0
1,0
0,82
0,85
0,84
0,83
0,82
Swiss franc
0,3
0,3
1,22
1,25
1,25
1,25
1,25
Canadian dollar
-3,5
-3,5
1,51
1,43
1,42
1,35
1,31
Australian dollar
0,0
0,0
1,54
1,40
1,41
1,39
1,36
New Zealand dollar
0,8
0,8
1,66
1,60
1,63
1,58
1,54
Swedish krona
0,2
0,2
8,83
8,80
8,60
8,50
8,30
Norwegian krone
-1,5
-1,5
8,47
8,00
7,80
7,60
7,40
vs. US-Dollar
1,36
1,30
1,30
1,25
1,20
(vs. USD, %)
Japanese yen
2,5
2,5
103
102
102
102
105
Swiss franc
-1,1
-1,1
0,90
0,96
0,96
1,00
1,04
Canadian dollar
-4,8
-4,8
1,12
1,10
1,09
1,08
1,09
Swedish krona
-1,2
-1,2
6,52
6,77
6,62
6,80
6,92
Norwegian krone
-2,9
-2,9
6,25 1,57
6,15
6,00
6,08
6,17
US-Dollar vs. …
(vs. USD, %)
British pound
-0,4
-0,4
1,65
1,53
1,55
1,51
1,46
Australian dollar
-1,4
-1,4
0,88
0,93
0,92
0,90
0,88
New Zealand dollar
-0,6
-0,6
0,82
0,81
0,80
0,79
0,78
*30.01.2014
Sources: Bloomberg, Helaba Research 
HELABA RESEARCH · 31 JANUARY 2014 · © HELABA
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