The Prime Minister Shinzo Abe is working for improving fiscal problem

Kumiko Gervaise, FX Market Analyst at Gaitame.com, on USD/JPY and EUR/JPY

The Bank of Japan Governor Haruhiko Kuroda has recently stated that raising the sales-tax from 5% to 8% would not have a big impact on the nation’s economic recovery. Do you also agree that the tax hike will not derail fragile economic recovery of Japan?

If the Japanese government can make the path through the cutting corporate-tax by raising sales-tax, and the BOJ can prepare next action of qualitative and quantitative easing, I agree to the thought of the BOJ Governor Haruhiko Kuroda. However, it is not an easy way. In my opinion, just raising sales-tax will increase the pressure on domestic demand. Thus, the market will want “one more action” in the short term from the central bank. If Governor Kuroda would show the positive attitude for additional easing, I think the Japanese Yen would lose some ground. Nevertheless, if Kuroda does not indicate any action after sales-tax is raised, the Yen would rise until the Governor unveils some additional policy measures.

Do you think that Abenomics is doing enough to fix Japan’s public debt problem as the nation has the biggest debt-to-GDP ratio in the world?

The Prime Minister Shinzo Abe is working for improving fiscal problem. However, the plan is not including sales-tax because it has not passed the Diet. Hence, the detail of the plan form Abe cabinet is obscure now. Basically Prime Minister Abe seems concentrated at stimulating economy first. Fiscal action is a higher priority for the Government of Japan than fiscal restraint. It is difficult to say “Abenomics is doing enough to fix Japan’s public debt problem”.

A while ago USD/JPY was swinging near the 100 barrier, but recently it has fallen to 98 level and since then has stayed more or less flat. Do you see the pair falling even further or it is just a short term trend?

To my mind, the Yen’s boost is just a short term trend because of summer vacation. Last FOMC minutes and recent U.S. employment statistics did not show obvious direction for the tapering’s start in September. I believe that the reason the market leaned toward squire the U.S. Dollar long position before summer vacation. As the market players are coming back, they would focus on “Tapering of QE” again. USD/JPY may be choppy, but the U.S. Dollar is expected to get stronger because of the difference of the attitude between the BOJ and Fed, as the U.S central bank sees tapering, while the Bank of Japan considers additional QE.

What are your short-term and longer term forecasts for EUR/JPY and USD/JPY?

During the summer vacation, USD/JPY has been choppy, influenced by stock market. I project that we would see 95Y level again. However, as the number of market players is increasing, “When and How to taper” will be back as the main topic in the market. The stronger the possibility for starting tapering in September is, the higher price of USD/JPY will go up. In the trend, 100Y may be just a pass point. The first target will be 101.53Y, the 8th July high price.

After FOMC meeting in September, the direction of USD/JPY depends on “what is decided” at the FOMC. The clear policy difference between the Fed and BOJ is leading USD/JPY to a higher level in the long term. If 103.73Y (high price on the 22th May) is taken, USD/JPY will aim at 105Y.

Currently EUR/JPY is not proactive and moving with stock prices same as USD/JPY. The number of market players declines and there is no emergent issue about the European debt problem because of a lot of market participants are on summer vacation. This trend is continuing until market players are coming back. However, once they are back, I expect EUR/JPY would lose direction because the market’s focus will be on “When and How to taper”, then the greenback will be the main currency in FX market. The movement of USD/JPY and EUR/USD offset each other. However, if a new problem about the European debt crisis arises, the Euro will be the main currency again and might weaken as a result. If the ECB shows a positive attitude to additional cut rate, it will also mount pressure for the common currency. In that case, there is a possibility that EUR/JPY may be down to around 120Y again.