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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 4 Darstellung möglicher Interessenkonflikte bei der Weitergabe von Anlageempfehlungen („Finanzanalysen“) gem. § 34b WpHG und MAR Diese Publikation wurde weitergeleitet von der Landesbank Hessen-Thüringen. 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