JPY: Controlled descent

Chris Turner, Global Head of Strategy at ING, suggests that the USD/JPY has a window to 120, helped by Trump announcing US tax holiday while the Trump’s protectionism or US weak dollar rhetoric are the risk, but fundamentals are $/JPY positive.

Key Quotes

“Both the Fed (informally) and the BoJ (formally) are now prepared to experiment with inflation above target. Real yield divergence will now be key.”

“On the one hand, Trump’s reflationary policies and the Fed’s tightening profile look set to drive UST yields higher throughout 2017. By contrast, the BoJ’s comprehensive assessment of its own QQE policy, published in September, formally introduced ‘Yield Curve Control’ (YCC) to pin 10-year JGB yields at 0% until further notice. Despite having a JGB yield target, the BoJ also currently estimates that it will take JPY80trn of annual JGB buying to achieve said target. Presumably that pace of purchases will accelerate into a bond bear market in 2017 – triggering more aggressive BoJ balance sheet expansion.”

“In addition, the BoJ’s increasing ownership of the JGB market may prompt speculation over the need for helicopter money next summer. The BoJ is seen as being the first in the queue to employ this tactic, not only because of Japan’s already huge debt to GDP ratio, but also the adventurous track record of Kuroda’s BoJ.”

“This should prove quite negative for JPY through the real rate channel. A rise in inflation expectations at a time when nominal rates, both at the long and the short end, are locked at the floor stands to weaken real interest rates and the JPY.”

“Declining real interest rates in Japan should also encourage a further search for yield from Japanese investors. With domestic incomes rising, we are already witnessing greater interest in FX-linked investment products. This has been particularly true for USD denominated Toushin investment trust products. And our view is that this Japanese confidence in overseas FX assets broadens and extends through 2017.”

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