Written by: Valeria Bednarik, Chief Analyst at FXstreet.com Independent Analyst Team.
There are lots more than Japan when you turn your eyes to Asia, although latest economic developments in the country had grabbed 100% of the attention: after years of a steady bullish trend that drove yen to historical record highs against major rivals, the currency has finally turned in the contrarian direction, and it seems yen slide is just starting. Anyway, Asia is quite more than the yen and Shinzo Abe.
Asia’s emerging economies account for less than 30 % of global GDP, but they contributed close to 60% of global growth in 2011, and even surged ahead in this ending 2012, despite the impact of debt crisis in Europe, the slow world economic recovery, and the feared US fiscal cliff. Growing slower than expected, latest growth forecast for these economies for this 2012 stands at 5.6%; final numbers will likely come in line with those expectations in upcoming January. What’s also interesting is that, excluding Japan, the economic outlook suggests the expansion will continue over 2013 at a higher pace.
China, India and Indonesia were among the few economies in the world that continued to expand, although the smaller economies were badly hit. Between September 2011 and March 2012, real GDP fell by an annualized average rate of 13% in Hong Kong, Malaysia, South Korea, Singapore, Taiwan and Thailand. However, there was a strong jump in Asian industrial production that rose by an annualized rate of 36% in the second quarter of this year, mostly due to China, that shinned over this 2012, and where industrial production rose by 11% in July, yearly basis.
Asia saw a sharp downturn late 2011 as a consequence of the US downfall, as exports were badly hit. But while demand from developed economies was actually weaker over 2012 due to the economic woes in Europe and America, local authorities imposed aggressive fiscal and monetary stimulus that helped revive domestic demand and therefore, avoid the slowdown contagion. The region managed a quick, strong rebound that if sustained, will likely extend over the upcoming 5 years, with a forecasted annual growth of 7-8% over the next five years.
Domestic consumption can continue rising: emerging countries have fairly high savings rates, but their income growth is so strong that they can increase spending with no problems. Along with productivity improvement, economies are safe, for now.
ChinaChina is a complete case by itself: the country rapid growth made it jump above Japan, and become the second largest economy of the world after the US. Chinese GDP expanded 2.2% in the third quarter of 2012 over the previous one; the communist centrally planned system from 30 years ago, does not longer exist: the economy turned to become a more market-oriented one, and exports had been the reason of its outstanding growth.
There are some questions however, that made China future not that bright: the country may face a downturn over the upcoming years, as there are two main issues building up, that can bust in the upcoming decade:
1) Markets are expressing concerns that a flood of liquidity is fuelling asset-price bubbles: in China share prices have almost doubled since their trough last November and most Asian countries have seen gains of around 50% or more since the start of the year.
2) The credit boom that supported the industrial explosion is unsustainable in time; but Chinese authorities will hardly change current economic policy, until inflation turns positive.
As anywhere in the world, there’s a price to pay for a continued easing economic policy, yet again, chances of any significant policy tightening are quite small at the time being, as fueling growth is the government priority.
JapanNewly-installed Prime Minister Shinzo Abe’s message is clear: the incoming government is ready to do whatever it takes to weaken the yen and stimulate the economy.
Conservative Shinzo Abe came to the spotlight a couple months ago and ahead of local elections, when as leader of the opposition he stated to call for “bold” “unlimited” easing in Japan. Adding latest December economic policy decision, a total of 101 trillion yen, or $1.2 trillion, have been poured into the country's asset-purchase and loan programs.
The country is fighting with deflation for several years already, and little has been done so far: inflation rate was of -0.40% in October of 2012. Historically from 1971 until 2012, Japan Inflation Rate averaged 2.8% reaching an all time high of 24.9%in February of 1974 and a record low of -2.5% Percent in October of 2009, well below the BOJ target of 1%, or Abe’s one of 2%. The GDP also contracted, by 0.9% in the third quarter of 2012, compared to previous one. Also, Japan’s ratio of government debt to gross domestic product, currently about 2.28, is by far the highest in the industrial world, almost double that of even Greece and Italy, and steadily growing; Japan’s trade balance went negative first time in 30 years, and with an expensive yen, companies shifted production overseas.
As per now, little has been actually done besides economic stimulus, for the local economy. But hopes on Abe’s policy will support growth in the worlds’ third-largest economy had sent yen to a 2 year low against dollar just this week.
Economic stimulus, however, should be the top of the iceberg: Japan needs much more than monetary easing, if they want to avoid a stronger downturn, with long term structural reforms in its system included to get back on track.
As faith in Abe builds up, the USD/JPY reached this week a high of 86.14, levels not seen since August 2010. Moreover, the weekly chart shows price above 100 and 200 SMA, first time since late 2007, which is a quite significant technical signal of further gains. Considering the pair has been in a steady fall since mid 2008 coming from a 110.60 high to a record low of 75.65 this year, latest recovery is just a start: 95.00 area seems achievable now, and will depend on two fundamental factors: the US fiscal cliff solution, and further action from newly elected Japanese PM. The daily chart shows indicators in extreme overbought readings, yet that has never been an issue for an ongoing trend in Japanese yen crosses: extreme readings will likely be corrected with a limited price retracement before more gains come trough. 84.80 comes as first support, as the pair left an unfilled gap there after latest economic decision, followed by the 83.20 area, lowest seen for the upcoming quarter, as long as fiscal cliff woes don’t trigger a strong panic ride in the currency markets. 88.20 is the first target area, as long as price stands above mentioned 84.80, followed by 92.00 price zone, and finally mentioned 95.00 for this next 3 months.
Personally, I don’t believe much in Euro recovery, although the currency has seen an interesting come back over the past few weeks. I do believe that yen weakness, and EUR/JPY recovering from the lows 92.00 to current 114.00 has a lot to do with latest Euro strength. Regardless what’s ahead for Europe, the yen will likely remain weak, and therefore, the EUR/JPY will continue to rise. Maybe at a slower pace, but rise anyway: the weekly chart shows price stalling right below 200 SMA, after breaching 100 one earlier this month, first time since August 2008. At current levels, and even with retracements up to 109.80, there is scope for a ride towards 117.50/118.00 area for the upcoming quarter. The daily chart shows a steady upside momentum and price surging to higher highs also ignoring overbought readings. The first support to follow comes around 111.40, where the pair has several daily highs and lows along with a weekly opening gap, followed later by 109.80. Above 114.00, 115.50 will be a tough bone to break, but once above, the way towards afore mentioned target will be quite clean.