Week in FX Asia – JPY Boosted by Safe Haven Pressures BOJ

• Bank of Japan leaves policy unchanged still upbeat about economy
• Japan prints worst six month current account balance deficit
• Geopolitical risks made the JPY a safe haven favoured destination

The Bank of Japan ended its two day meeting with few surprises. There was no additional stimulus for the economy. The central bank continues to be upbeat about the pace of growth of the country. The effect of the sales tax hike is still considered temporary and the BOJ expects the impact to dissipate in the coming months.
Governor Kuroda did accept the new exporting reality as Japan’s exports grow, but as a slower pace than their imports.

Japan registered a current account deficit of 507.5 billion yen in the first six months of 2014. Imports jumped 14.7 percent from a year earlier to 41,875.2 billion yen against a backdrop of rising energy imports. Exports on the other hand climbed less than expected to 8.1% to 35,762.7 billion yen boosted in part by a weak currency.

Japan’s trade deficit hit a record high ¥7.6 billion in the first half of 2014, according to the Japanese Ministry of Finance. The country’s economy desperately needs its exports to increase but neither sluggish emerging market demand nor a weaker yen has translated into sustainable success. Clearly, Japan needs more than arrows to lift its sagging fortunes.

Moreover, Japan’s industrial output has been on the wane since the devastating 2011 Tōhoku earthquake. A shifting manufacturing landscape compounds Tokyo’s difficulties as companies have increasingly moved production to other countries to avoid exchange-rate risks and increase their market share. One member of the BoJ’s policy-setting committee recently remarked Japan needs to find a new growth model, one that doesn’t depend on exports.

The Abe government’s decision to raise its consumption tax last April from 5 per cent to 8 per cent is also having an impact on consumer demand at home. Though the drop in household spending in the second quarter was deep, few expect it to last as Japanese consumers adapt to its existence.

To further complicate matters, the yen remains a global safe-haven asset investors near and far turn to in times of geopolitical strife, and there has been no shortage of events in recent months driving investors to buy the yen, in turn strengthening it.

The Bank of Japan had a standout year in 2013 when it was the main architect of making Abenomics a reality. In 2014 major central banks have begun to hint at a repositioning of their policies which will leave the BOJ on the side of the ECB. The Fed and the BOE will begin raising rates, although early to mid 2015 seems the most likely timelines. This could delay any action by the Japanese central bank until the rates landscape is clearer that it is now. This could leave the BOJ’s interventions in 2014 as purely rhetorical.

Next Week For Asia:
Japan will be under the spotlight next week. Early in the week the Japanese Tertiary Industry Index will be released. Consumer confidence and Machine tool orders will follow the next day. The Bank of Japan will release the minutes from their latest policy meeting minutes on the same day that the GDP numbers are announced. Following this week’s announcements the Japanese economy seems to be struggling to maintain the momentum it built in 2013. The Bank of Japan continues to be confident in the economy, but there are serious questions being raised about when the central bank will act as it will be most likely needed sooner rather than later.

Around the world traders will be taking a closer look at German releases. The ZEW Investor sentiment will be released on Tuesday and Germany’s GDP will be published on Thursday. Russia’s food sanctions have sparked again geopolitical risk in the region even though it is expected that Moscow will try to diffuse the situation.