Home Central Banks The Japanese Currency Is Helping Exports, and YEN/USD Remains High and Stable

The Japanese Currency Is Helping Exports, and YEN/USD Remains High and Stable

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Written By: Richard Koch – Forex Focus

Members of the monetary committee of the Bank of Japan (BOJ) have excluded for the moment the possibility of decreasing their monetary-easing policy. The issue is that their 2 percent target for inflation is far from being achieved in Japan and is not forecast to be in the short-term. Until economic growth is solid, the Bank of Japan plans to continue easing monetary conditions for the country.

Since the spring of 2013, the Bank of Japan has continuously bought assets on the market and maintained negative rates in the hope of sustaining economic activity. Unlike the European Central Bank (ECB), the Bank of Japan has not opened any possibility yet to reduce its quantitative easing. However, doubts about the efficiency of these measures have risen.

On the one hand, a certain recovery of the economy has been observed.

The gross domestic product (GDP) growth of Japan achieved 1 percent during the first quarter of 2017; it was the fifth consecutive quarter of growth for Japan, the longest GDP growth duration for 11 years. Exports are in an increasing trend, with +2.5 percent in the first quarter 2017, and household spending has been sustained. Business morale is at the highest level of the last three years. The confidence index of big industrial firms has increased, according to Tankan’s survey published in June by the Bank of Japan. This index is at +17 against +12 previously, rising back to the level of March 2014. It is beyond the experts’ (Nikkei Group and Bloomberg) expectations; they predicted the index would be at +15. The Tankan study surveys 10,000 companies of all sizes and all sectors every month and measures the differences between the companies that consider the environment as favourable to them and the companies that consider it unfavourable.

As far as nonindustrial firms (financial and services) are concerned, the Tankan survey shows a three-point increase to +23, thanks to household-consumption and tourism activities. The number of foreign visitors is progressing and expected to increase until 2020, due to the government’s policies within the perspective of the 2020 Summer Olympics being hosted by Japan. Building companies are also benefiting from this policy. For large companies in all economic sectors taken together, confidence is progressing by four points to +20. And medium and small companies’ confidence is increasing as well, according to the latest Tankan survey.

But on the other hand, inflation is not showing any signs of rebounding.

The promises of Japan’s governor, Haruhiko Kuroda, to obtain a 2-percent rate of inflation are vanishing. And the next governor election is planned for April 2018. During its April meeting, the Bank of Japan had forecast +1.4 percent inflation for the 2017 fiscal year and +1.7 percent for 2018. A Reuters survey revealed an average forecast figure by economists at around +0.7 percent for 2017-18 and not more than + 0.8 percent for the 2018-19 fiscal year.

In this situation, the Japanese currency is holding a balanced position, helping Japanese exports.

The yen rate is considered as favourable to the Japanese industry, and its increase due to the US election was not seen as a long-term trend. As showed in the graph below, the yen exchange-rate evolution over one year varied from around 110 yen per euro in July 2016 to 122 at the end of 2016 and beginning of 2017. Then it rose to 125 yen per euro in May 2017 and again to 128 at the end of June. This slight depreciation is favourable, of course, to exports, but remains moderate, according to the specialists.

While the alert zone is considered to be 100 yen per dollar, the yen against the dollar rate is also considered as favourable. On July 5, the USD/JPY fell to 113.17. Earlier, the USD/JPY had risen to its highest level since mid-May as the Japanese currency weathered choppy trading conditions that emerged after North Korea launched an intercontinental ballistic missile.

Forecasts for the yen at the end 2017:

During its next meeting on July 19-20, the Bank of Japan should confirm the continuity of its monetary policy, but also could be more optimistic towards the economic growth of its country. According to the site longforecast.com, the yen could settle at around 120 per dollar during the last quarter 2017.

The yen exchange rate is likely not to be driven by Japanese economic events, but rather by those of the United States. US interest rates have slowly been raised and are staying up. Japanese interest rates remain miserable, and this is unlikely to change. Except for a miracle, interest rates will certainly not increase on the 2017 forecasted horizon in Japan. Thus, given the size of the USD/JPY spreads, it should be made very clear that the yen is expected to fall.

However, one must remain cautious, as another increase in US interest rates have already largely been integrated into traders’ assumptions. And the rise of US protectionism, promised by President Donald Trump, also could weaken the US dollar in the long run, provided this promise is executed.  Thus, 120 yen per dollar is probably too high for the next quarter.


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