Research Team at MUFG, suggests that the lack of further upside for USD/JPY this year even as short-term US yields moved higher in anticipation of the first rate hike that finally arrived this week is an indication that the dynamics in the yen market are changing.
“We believe there are three key factors that have been at play to help support the yen, factors that we believe will continue into next year. Firstly, the BOJ has become increasingly reluctant to ease its monetary policy further. The steps taken by the BOJ were all technical and more designed to maintain the current stance rather than to implement further easing.”
“Governor Kuroda stated that there is no limit to monetary easing. But there clearly is and the extension of JGB maturities to 12yrs and the expansion of acceptable collateral underline the growing scarcity of JGBs in the open market. Furthermore, there was nothing in the comments made by Governor Kuroda to suggest the BOJ is moving toward additional monetary easing.”
“Secondly, as we have been highlighting recently, Japan’s current account position has undergone a remarkable turnaround over the last year or so. Japan’s 12mth current account balance has gone from a deficit of JPY 298bn in Sept 2014 to a surplus of JPY 15,236bn in Oct 2015, the fastest turnaround on record, with the surplus equating to 3.1% of GDP. While the trade deficit has shrunk notably due to the falling price of oil and could reverse, the investment income surplus is far more stable and alone accounts for a larger 4.0% of GDP.”
“Finally, the great public fund diversification flow that has been substantial over the past year or more, is set to come to an end suggesting capital outflows may struggle to surpass the growing inflows on the current account. As we’ve highlighted before, the GPIF flow into foreign equity markets through Japan Trust banks looks to be coming to an end.”
“Given the broader favourable dollar view we have, at least for the first half of the year, we are not forecasting notable strength for the yen versus the dollar with a year-end target of 117.00. But our lower euro forecast implies EUR/JPY potentially falling to 120.00, a near 10% drop from current EUR/JPY spot level.”