Download US adjusts the currency by about 10 yen (March 30, 2016)

Market Insight
March 30, 2016
US adjusts the currency by about 10 yen
Hajime Takata, Chief Economist
The yen has appreciated sharply since February with the JPY/USD touching levels above 110 yen. The
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writer has for many years used the analogy of a children’s game of ‘Red Light Green Light ’ when discussing
the foreign exchange markets, where change in the JPY/USD medium-term trend is dictated by ‘it’ (i.e., the
US). Despite the current strong resolve of the US to weaken the US dollar by about 10 yen, there has not been a
sustained period of fostering a full-fledged depreciation of the dollar. Consequently, even if there is a temporary
appreciation of the yen to above 110 yen, a major adjustment to be above 100 yen seems unlikely. On reflection,
the US policy to weaken its own currency through quantitative easing measures since 2007 (marked as (6) in
the chart) with QE1, QE2 and QE3, when the US suffered its first balance sheet adjustment since the Great
Depression, led to the excessively strong yen. On the other hand, the US shifted its weak domestic currency
policy from late 2012 leading to a change in foreign exchange levels, shown as (7) in the chart. Abenomics
coincided with the US economic recovery and the currency policy shift. The point on the chart marked (8),
[ Chart1 :
JPY/USD
]
（JPY）
400
(2)Augst 1971
Nixon Shock
350
(4)September 1985
Plaza Accord
(1)1949～
GHQ sets the USD/JPY
rate at USD1=JPY360
300
(7)2013～
Prospests of a contraction
of US monetary easing
250
200
150
(3)1978～
Carter administration's dollar defense
policy , Fed Chairman Volker's high
interest rates to fight inflation
（8） 2016？
100
(5)1995～
Treasury Secretary Rubin's strong
dollar policy
50
(6)2007～
Subprime crisis erupts
Dollar takes downturn
(CY)
0
49
54
59
64
69
74
79
84
89
94
99
04
09
14
Source: Made by Mizuho Research Institute Ltd. (MHRI) based upon Bloomberg.
In the game of red light green light, when ‘it’ (i.e., the US) says red light (i.e., the US cuts interest
rates) those participating in the game are unable to move (i.e., Japan is unable to hike interest
rates).
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Market Insight
March 30, 2016
when the yen weakened to levels above 120 yen to the dollar, indicates the start of the “Red Light” and
depreciation of the dollar by about 10 yen to below 115 yen. The G20 meeting in February is seen to have given
tacit approval to the weak dollar stance of the US. At the same time, the use of increased levels of negative
interest rates by the BOJ is unlikely to be effective as long as the US indicates resistance to a weak yen.
Nevertheless, we do not believe there has been a return to a weak dollar trend such as was evident from 2007
(marked as (6) in the chart).
Were the US to suffer an economic downturn and implement renewed monetary easing policies such as
interest rate cuts and, in the extreme, a negative interest rate policy there would be a return to the situation that
preceded (7) in the chart. However, recent US economic indices show signs of a bottoming out in exports from
manufacturers. Non-manufacturing sentiment also remains stable, and there appears to be limited risk of the US
falling into recession. Nevertheless, the scenario presented by the authorities at the March FOMC meeting no
doubt involves the need to curb the strong dollar by a certain degree and the market is taking the lead on
suppressing expectations for additional interest rate hikes.
The following chart illustrates the trend in the JPY/USD market and the expected exchange rate. The yen has
strengthened by about 10 yen this time. This is the first time since October 2012 that the yen has been higher
than the expected exchange rate. That is, the yen is stronger than the expected exchange rate for the first time
since the introduction of Abenomics. The stock price rise during the past 3 years of Abenomics has been caused
by a virtuous cycle of the yen always being below the expected exchange rate  upward revisions in corporate
earnings  higher stock prices  improved sentiment. The cycle has been broken this time. This has resulted in
a large stock price adjustment driven by overseas investors. The problem is whether or not there will be a return
to a downward trend for stock prices due to a strong yen that exceeds the expected exchange rate, as was the case
from 2007, shown in the chart.
[ Chart2 :
JPY/USD and expected exchange rate
(JPY/USD)
]
The yen is stronger than expected among
corporate enterprises
130
120
110
100
90
80
70
05/Apr
JPY/USD exchange rate
Expected exchange rate (BOJ Tankan)
06/Apr
07/Apr
08/Apr
09/Apr
10/Apr
11/Apr
12/Apr
13/Apr
14/Apr
15/Apr (CY/Mo)
Notes: The expected exchange rate is based on the Bank of Japan, Short-Term Economic Survey of Enterprises in Japan (Tankan)
(all enterprises/ all industries). Referring to the June survey for the first half and the December survey for the second half.
Source: Made by MHRI based upon the Bank of Japan and Bloomberg.
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Market Insight
March 30, 2016
As noted above, even if there is a temporary adjustment, a major adjustment in Japanese stocks would be
unlikely if the US avoids recession and there is no return to a weak dollar trend. However, it is also important to
recognize the high probability of a strong US resolve to foster a certain level of weakness in the dollar. Domestic
currencies have depreciated since last year with the implementation of negative interest rate policies in Europe
and Japan, while the dollar has strengthened as neighboring Canada has also fostered a weak Canadian dollar
and China has devalued the renminbi. This has forced the US to be resolute on a certain level of adjustment. This
can also be seen as an expression of opposition to the weak yen fostered by Japan’s negative interest rates. A
similar stance is also taken towards the euro. Looking ahead, the rule of the ‘Red Light’ is that as long as ‘it’ (i.e.,
the US) does not want a weak yen, the yen is unlikely to weaken regardless the level of Japan’s negative interest
rates. Therefore, even if further strengthening of the yen is unlikely, Japan will have to accept levels of between
110 and 115 yen for the foreseeable future. There is also the risk of a drop below 110 yen if there are US
economic concerns. Of particular note is the risk of further appreciation of the yen if Donald Trump becomes a
stronger candidate for the US presidency.
This publication is compiled solely for the purpose of providing readers with information and is in no
way meant to encourage readers to buy or sell financial instruments.
Although this publication is
compiled on the basis of sources which we believe to be reliable and correct, the Mizuho Research
Institute does not warrant its accuracy and certainty.
Readers are requested to exercise their own
judgment in the use of this publication. Please also note that the contents of this publication may be
subject to change without prior notice.
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