Eric Viloria, Senior Currency Strategist at Gain Capital Group LLC , on Japanese Economy
The Bank of Japan announced an aggressive expansion of its monetary easing programme recently and increased its asset-purchase fund by 10 trillion Yen in order to stimulate the economy.
Do you think the efforts made by the central bank of Japan will be paid off, if we take into account the current global slowdown, which can be observed in the country’s major trading partners’ economies?
This asset-purchase programme has been around for quite a while, this is actually the 7th time that the Bank of Japan expanded the asset-purchase programme and from what we have seen in the past, Japan is still facing deflation. The Japanese Yen has continued to get stronger and the monetary easing programme is a response from the country’s central bank; the bank itself considers that the easing, relatively speaking, is not likely to have a lasting impact, which can be seen even from the recent reaction on the currency market. We can initially put the Japanese Yen against the U.S. Dollar, and now the Yen is stronger against it. A lot of market participants were expecting more easing from the Bank of Japan, but what the bank did on Wednesday was a little more than expected, but it is still limited. The central bank expanded its asset-purchase fund by JPY 10 trillion, but by increasing the length of the programme, amount of monthly purchases reduces. If we take a look at some of the other central banks, for example the Fed and the ECB, they are basically committed to doing whatever it takes - the Fed is doing open-ended easing, the ECB stated that they are going to buy unlimited amounts of bonds for sovereigns that request aid. This recent action taken by Japan is limited, they have set amounts and it is not that aggressive; and there is still this deflationary environment. Most probably we will see them moving forward, if it is going to help to get back to that one per cent target, but this is something that they have been struggling for quite a while.
How would you evaluate the current performance of the Japanese Yen?
What are your forecasts for the currency performance against its main counterparts, the U.S. Dollar and the Euro?
I think that we could see Yen strength moving forward. If we look at the U.S. Dollar against the Japanese Yen, obviously the Japanese policy will have an impact on the pair, but it is not the only driver. In fact, one of the main factors that impact the U.S. Dollar versus the Japanese Yen pair, is going to be the U.S. Treasury yields. The yields moving lower is one of the reasons why the USD/JPY pair is going down, but we still think that there is potential for U.S. treasury yields to move higher, as inflation expectations are increasing, because the Fed is engaged in unlimited quantitative easing and because they are doing mortgage-backed securities and not Treasuries. One of the other factors that impact the Yen against all currencies is global risk sentiment. So in times of risk averting, investors are willing to buy the Japanese Yen because it is seen as a safe haven. The U.S. Dollar is also seen as a safe haven, but because of this open-ended QE programme, it becomes less attractive. The Fed may continue to print more dollars, which would devaluate the currency. The Bank of Japan with their easing programme makes the Yen a bit more attractive in that respect. In my opinion, the outlook here is that we could see further Yen strength, the risk though is for intervention, if the Ministry of finance indicates to the Bank of Japan to intervene. We have seen that in the past, it happened at the end of October and little bit at the beginning of November last year. USD/JPY was down around the 75.5 level, so we are still about 300 pips above that right now. We think that if we see new lows in USD/JPY, then probability of intervention would increase dramatically.
What will be the main drivers that will determine the JPY performance in the future?
The main drivers are going to be the U.S. Treasury yields, when we are looking at USD/JPY; it is going to be the global risk sentiment, because the Yen has that safe haven factor; and then it is also going to be the Japanese policy, not only monetary policy from the Bank of Japan, but also from Ministry of Finance and Japanese officials, as if they indicate that there is going to be intervention.