Trump presidency is a test for the BoJ - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, suggests that a Trump Presidency suggests that the Trans-Pacific Partnership on trade is essentially dead in the water and that said, the Japanese press has reported that Abe is pushing for the US to remain on board and for other countries to continue with the ratification progress of TIPP. 

Key Quotes

“Even so, according to Kyodo News Japan is preparing to change its focus to the Regional Comprehensive Economic Partnership (RCEP).  This programme includes China, Japan, S.Korea, India, NZ, and Australia in addition to the 10 Asean countries.  Altogether the RCEP could cover around 27% of global trade in a region in which China is already the dominant trading partner.  A regional trade deal has the potential to raise China’s global standing as well as within Asia.   That said, while China is now Japan’s largest trading partner, Japanese exports to the US are still substantial.  According to the Office of the US Trade Representative exported to the US goods totalling USD138.5 bln in 2013, around 6.1% of total US imports.”  

“A protectionist US raises the risk of another blow to demand and growth in Japan.  In turn this suggests a continuation of reflationary policies in Japan.  However, as US yields have reacted to the burst of enthusiasm regarding reflation, there has been some upward drag on Japanese bond yields.  This could provide a test for the BoJ Governor Kuroda, given that since Sept 21 the central bank has been committed to fix the 10 yr JGB yield at zero percent.  If US yields continue to rise the BoJ would presumably have to step up the pace at which bonds are purchased and the US-JP bond spreads could continue to widen.  As things stands the near-term outlook for the USD vs. the JPY therefore appears to have picked up a lot of support.  Consequently we have revised up our USD/JPY forecasts in response to the movement in yield spreads.  However, since we are sceptical over the ability of US yields to hold their current trend longer-term, we have reined back our revisions.  We see USD/JPY at 108.00 on a 3 mth view and at 107.00 on a 12 mth view.”