Download FX FOCUS Japanese yen

Helaba Research
FX FOCUS
18 December 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

While the major currency pairings remained fairly stable, commodity currencies, in
particular, came under pressure, some considerably so; the Russian ruble collapsed.
The Japanese yen depreciated once again noticeably in recent months. Although Japan’s
expansionary monetary policy is weighing on the currency, growth will improve slightly
following the recession in 2014, which means that the central bank will not necessarily take
further steps. In spite of the approval by the voters, there are legitimate questions about the
effectiveness of “Abenomics”. Various indicators suggests that the yen is undervalued. The
weakness of the yen should therefore come to an end, and the yen should stabilize against
the US dollar and especially against the euro.
Helaba Currency Forecast
Euro performance on a month-over-month basis
% vs. euro compared to the previous month (from 11/18 to 12/17/14)
1,6
0,0
1,2
0,0
Japanese yen
British pound
Swiss franc
Canadian dollar
-1,3
Australian dollar
-5,4
New Zealand dollar
-1,2
Swedish krona
-2,3
Norwegian krone
-7,7
0,4
Czech koruna
Polish zloty
-0,4
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.
US dollar
Hungarian forint
-2,7
Russian ruble
-21,6
Turkish new lira
-3,5
0,3
-1,1
-2,4
-3,6
-3,0
-5,4
South Korean won
Chinese yuan
Indian rupee
South African rand
Brazilian real
Mexican peso
■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets
Sources: Bloomberg, Helaba Research
HELABA RESEARCH · 18 DECEMBER 2014 · © HELABA
1
FX FOCUS JAPANESE YEN
JPY: stabilization
The Japanese yen just keeps falling – notwithstanding a slight stabilization most recently. During
the first half of the year the Japanese currency was actually one of the winners. But a wave of
selling began again in the summer. The yen already depreciated drastically between the fall of
2012 and the end of 2013. Japanese politics played a significant role in this intended devaluation.
No change of course is in sight following the re-election of Prime Minister Abe. Will the Japanese
currency continue to decline or even go into a free fall is politics can no longer control the
weakness?
Politically generated
yen depreciation
The LDP under Shinzo Abe took over the reins of government at the end of 2012. Since then,
Japanese politics has been pursuing a higher inflation. To that end, the Bank of Japan (BoJ)
expanded its asset-buying programs massively, not least to weaken its own currency. In addition,
the government passed several spending programs. After initial successes, however, growth
waned, especially when the VAT was raised from 5 % to 8 % in the spring of 2014. Japan’s
economy is now in a recession, and GDP shrank in the third quarter by no less than 1.3 % over the
previous year. The BoJ expanded its buying program once more, and its monetary base is now to
rise by 80 instead of 70 trillion yen annually. The even more expansionary monetary policy and the
weaker economic data were the reasons behind the renewed yen weakness.
Recession instead of upswing
Private consumption suffering from low real wages
GDP year-on-year or quarter-on-quarter in %
% yoy
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
What is Abe using
his power for?
After Prime Minister Abe’s surprise move to dissolve the lower house of parliament and
simultaneously postpone the second stage in the VAT hike to 2017, his LDP defended its clear
majority in the recent new election. At the very least, Abe need not pay much attention to coming
elections. But it is by no means certain whether, in addition to restarting the nuclear power plants,
he will in fact undertake the structural reforms that have been put off so far – including in the areas
of free trade agreements, the labour market, and the agricultural sector. Not only is there some
opposition within his own party, Abe, who held the office of prime minister once before in 2006/07,
does not give the impression of being a radical reformer. Thus the focus could be more on the
foreign policy agenda. Abe seems currently completely unchallenged as Prime Minister, but it will
not stay that way in Japan if he has no successes to show.
On balance, the growth effects of “Abenomics” have been modest. To be sure, initially the
economic mood brightened, which stimulated investments noticeably in 2013. However,
businesses have already been much more restrained again this year. While private consumer
spending was convincing in the lead-up to the hike in the VAT, the slump in the spring was that
much more pronounced. In the face of declining real wages – the government appeals for wage
increases should hardly help – no major growth impulses will come from consumption. Moreover,
because of the low savings rate, households have hardly any reserves. In contrast, government
demand is remaining positive, meanwhile the necessary consolidation of the budget is not making
any headway.
HELABA RESEARCH · 18 DECEMBER 2014 · © HELABA
2
FX FOCUS JAPANESE YEN
“Abenomics” without
sustained success“
The depreciation of the yen by means of monetary policy, which is intentional within the framework
of “Abenomics”, was supposed to strengthen foreign trade, just as the textbooks teach. But
Japan’s current account balance improved only recently. In addition to higher capital incomes from
abroad, this resulted from lower energy imports. Although exports rose nominally, in some cases
quite markedly, adjusted for price – that is, without the yen effect – they stagnated. It was only
most recently that real exports improved noticeably. The decline in the exchange rate produced
only limited impulses for foreign trade, at least so far. And since companies are also hardly using
their higher profits to boost investments, and since private households actually suffered income
losses from the higher import prices, the overall success of this policy is rather questionable.
Current account balance improved ony recently
Yen with unusually favourable valuation
% of GDP
Real, trade-weighted exchange rate index
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
Japan no Zimbabwe
The asset purchases by Japan’s central bank have pushed the ten-year yield to a record low.
Since the BoJ is by now buying up the majority of issues, the interest rate level would be noticeably
higher without these purchases, especially since the national debt is exorbitant at 240 % of GDP.
This kind of monetary policy and state finances makes one think more of states like Zimbabwe,
where the government´s printing of money has caused hyperinflation. However, the economic
structures of the two countries are profoundly different. Most recently, inflation in Japan stood at
right around 3 %, which is already unusually high for that country. But if one takes out the hike in
the VAT and the higher import prices resulting from a weaker yen, there is not much left. Inflation
will decline in 2015. Even if politics is a cause for concern from a long-term perspective, it is highly
unlikely that the Japanese economy will falter any time soon.
Interest rate differences do not reflect yen weakness
ECB policy dampens euro-yen exchange rate
JPY
ratio
% points
Sources: Macrobond, Helaba Research
JPY
* Assumption: BoJ boost monetary basis by 80 trillion yen annually ECB basis rises to
2012 high.
Sources: Macrobond, Helaba Research
When it comes to the current account balance, Japans will increase its shrunken surplus again
thanks to higher exports and lower energy imports. Moreover, the country has considerable assets
abroad. The economy will grow again slightly in 2015. On the basis of purchasing-power parities or
HELABA RESEARCH · 18 DECEMBER 2014 · © HELABA
3
FX FOCUS JAPANESE YEN
the real exchange rate indexes, the yen is by now markedly undervalued. Although the interest
rates are exceedingly low in Japan, in terms of a historical comparison sovereign bonds are not
yielding much more either in the euro zone or in the US. Adjusted for inflation, as well, the yields in
Japan are not that low if inflation eases next year. Nothing points to a renewed expansion of the
central bank’s asset-buying program. Moreover, it is open whether this measure will be continued
to its full extent also in 2016, given its rather questionable success.
Limited yen depreciation
against US dollar
In spite of a multitude of problems, the situation is not that gloomy for the yen. Many speculators
have already taken a position against the Japanese currency. For example, some carry trades
were financed in yen, and they will be unwound if the risk aversion in the financial markets rises
again. And since the dollar-yen exchange rate, in particular, is strongly oversold in terms of the
technical data, there is short-term recovery potential here. Although the upcoming interest rate
turnaround in the US will presumably carry the dollar-yen rate once more over the 120 level in
2015, the yen should stabilize thereafter. Since the ECB, with the expected buying programs, is
moving virtually along Japanese tracks, the euro-yen exchange rate should actually weaken
somewhat over the coming months.
Helaba Currency Forecasts
Performance
year to date 1 month
vs. Euro
current*
Forecast horizon at end ...
Q1/2015
Q2/2015
Q3/2015
Q4/2015
(vs. Euro, %)
US dollar
11,4
1,6
1,23
1,20
1,15
1,20
1,25
Japanese yen
-1,2
0,0
146
143
140
142
144
British pound
4,8
1,2
0,79
0,78
0,77
0,75
0,77
Swiss franc
2,2
0,0
1,20
1,22
1,22
1,22
1,25
Canadian dollar
1,7
-1,3
1,44
1,37
1,30
1,33
1,36
Australian dollar
1,4
-5,4
1,52
1,41
1,38
1,43
1,47
New Zealand dollar
4,5
-1,2
1,60
1,58
1,53
1,58
1,60
Swedish krona
-6,5
-2,3
9,46
9,10
9,00
8,80
8,70
Norwegian krone
-8,8
-7,7
9,14
8,40
8,30
8,10
8,00
vs. US-Dollar
(vs. USD, %)
Japanese yen
-11,2
-1,5
119
119
122
118
115
Swiss franc
-8,2
-1,5
0,97
1,02
1,06
1,02
1,00
Canadian dollar
-8,7
-2,9
1,16
1,14
1,13
1,11
1,09
Swedish krona
-16,0
-3,9
7,67
7,58
7,83
7,33
6,96
Norwegian krone
-18,1
-9,1
7,41 1,57
7,00
7,22
6,75
6,40
US-Dollar vs. …
(vs. USD, %)
British pound
-5,9
-0,4
1,56
1,54
1,49
1,60
1,62
Australian dollar
-8,9
-6,8
0,81
0,85
0,83
0,84
0,85
New Zealand dollar
-6,2
-2,7
0,77
0,76
0,75
0,76
0,78
*17.12.2014
Sources: Bloomberg, Helaba Research 
HELABA RESEARCH · 18 DECEMBER 2014 · © HELABA
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