Con­cerns about state of the Ja­panese econ­omy

Financial Mirror (Cyprus) - - FRONT PAGE -

Dis­ap­point­ing Ja­panese data and strong US eco­nomic data up­ended the yen’s per­for­mance in re­cent weeks. Im­pend­ing eco­nomic an­nounce­ments from the US in­clude the US labour mar­ket re­port, but big­ger con­cerns in­clude the de­ci­sions of cen­tral banks vis-a-vis pol­icy mea­sures in re­sponse to the global eco­nomic malaise. Eco­nomic lead­ers from the world’s 20 largest economies agreed at the lat­est G20 sum­mit that they will up­date one an­other about any po­ten­tial pol­icy moves that will im­pact upon cur­rency strength, no­tably de­val­u­a­tions.

The an­nounce­ment from the G20 en­sures that all par­tic­i­pat­ing coun­tries will not en­gage in com­pet­i­tive de­val­u­a­tions of their cur­ren­cies in an at­tempt to gain an edge over one an­other. This is par­tic­u­larly con­cern­ing in China and Ja­pan.

Af­ter China re­cently weak­ened the CNY, com­pet­ing coun­tries found them­selves scram­bling to sim­i­larly de­value their cur­ren­cies in or­der to re­main com­pet­i­tive with China on an ex­port level. The G20 sum­mit re­solved to pre­vent sur­prise de­ci­sions from desta­bil­is­ing an al­ready tee­ter­ing global econ­omy. One of the big­gest ca­su­al­ties of a sur­prise de­val­u­a­tion would in­vari­ably be the Ja­panese yen, but that is un­likely to take place now that an agree­ment has been ham­mered out.

Of equal im­por­tance for the pros­per­ity of the Ja­panese econ­omy is the non-farm pay­rolls re­port in the US. That an­nounce­ment will be made at 8.30am on Fri­day, March 4. The pre­vi­ous NFP fig­ure was 151,000, and the con­sen­sus es­ti­mate is 190,000 with a fore­cast of 195,000. The US un­em­ploy­ment rate for Fe­bru­ary will also be an­nounced at 8.30am on Fri­day, March 4, and the pre­vi­ous fig­ure was 4.9%, and the con­sen­sus fig­ure is 4.9%.

Any pos­i­tive sur­prises in US eco­nomic per­for­mance in key sec­tors will in­vari­ably cause a rally of the USD and weaken the JPY. The strength of the US dol­lar works in close cor­re­la­tion with the de­ci­sions made by the Fed­eral Re­serve Bank.

If in­deed the dol­lar is strength­en­ing and the econ­omy is ro­bust, the Fed will have no hes­i­ta­tion in rais­ing in­ter­est rates by 25-ba­sis points in March or June to 0.75%. This in turn will have a neg­a­tive ef­fect on the JPY, EUR, GBP and emerg­ing mar­ket cur­ren­cies over­all. A strong USD is a dis­in­cen­tive to in­vest­ment in emerg­ing mar­ket economies, and ac­cel­er­ated cap­i­tal flight will re­sult. Ja­pan which is presently ex­pe­ri­enc­ing a neg­a­tive in­ter­est rate at -0.1%, and a neg­a­tive GDP growth rate will in­vari­ably per­form poorly if the Fed de­cides to hike in­ter­est rates in the US. If on the other hand the US eco­nomic data points to an in­crease in un­em­ploy­ment, or a wors­en­ing of the bal­ance of trade, or neg­a­tive per­for­mance in the ISM non­man­u­fac­tur­ing PMI, the dol­lar could weaken.

From the Ja­panese per­spec­tive, there are sev­eral up­com­ing an­nounce­ments that could move the Ja­panese yen, in­clud­ing the GDP growth rate (quar­ter on quar­ter) for Q4, 2015 and the an­nu­alised fi­nal GDP growth rate for Q4, 2015. Other fac­tors to look out for in­clude the con­sumer con­fi­dence in­dex for Fe­bru­ary on Tues­day, March 8, the Bank of Ja­pan in­ter­est-rate de­ci­sion on Mon­day, March 14, and the bal­ance of trade for Fe­bru­ary on Wed­nes­day, March 16. Th­ese eco­nomic an­nounce­ments will likely move the nee­dle for the Ja­panese yen if con­sen­sus es­ti­mates are not con­gru­ent with the ac­tual per­for­mance fig­ures. Mean­while, the Ja­panese CPI in­fla­tion re­port which was re­leased in­di­cates that the Bank of Ja­pan is un­likely to change in­ter­est rates from their cur­rent level of -0.1%.

An­other as­pect work­ing in favour of the Ja­panese yen is the high de­gree of volatil­ity in fi­nan­cial mar­kets, par­tic­u­larly in Asia-Pa­cific.

How­ever, just re­cently the Chi­nese econ­omy started to turn the cor­ner when steel pro­duc­tion in­creased. Fol­low­ing the Lu­nar New Year in China, a sharp uptick in steel pro­duc­tion was re­ported in Chi­nese steel mills and this re­sulted in a spike in the price of iron ore above $50.30 per tonne. This sparked a frenzy of ac­tiv­ity in coun­tries that sup­ply China with iron ore such as Aus­tralia, South Africa and oth­ers.

When the Chi­nese econ­omy is boom­ing, there is less de­mand for the save-haven cur­rency of the JPY. In the event that on­go­ing volatil­ity is ben­e­fi­cial to the yen, the USD/JPY cur­rency pair will weaken. We have al­ready seen tremen­dous strength in ma­jor av­er­ages on Wall Street, in­clud­ing the S&P 500 in­dex which ral­lied re­cently. A de­cline in volatil­ity may not bode well for the Ja­panese yen, and nei­ther will an im­prove­ment in the eco­nomic con­di­tions in China.

The USD/JPY cur­rency pair is trad­ing at 114, which is a slight weak­en­ing of the yen from the pre­vi­ous level of 113. The cur­rency pair has weak­ened by 4.51% over the past 52weeks. Dur­ing the past month, the yen has strength­ened against the green­back, fol­low­ing a 4-year de­cline from a level of ap­prox­i­mately JPY 76 to the dol­lar to as much as 125 to the dol­lar.

The yen has man­aged to claw its way back as a re­sult of China weak­ness, and this is ev­i­dent in the cur­rency ex­change rate with the dol­lar which started to strengthen around the same time that the Chi­nese stock mar­ket tanked. While the ap­pre­ci­a­tion in the Ja­panese yen has been marginal, it is clearly ev­i­dent and looks to be part of a longer term trend that is de­vel­op­ing.

The per­for­mance of the yen against the green­back will likely be tem­pered by im­pend­ing in­ter­est-rate hikes in the US. None­the­less, the yen will strengthen against the euro and the pound – both of which are go­ing to come un­der in­creas­ing pres­sure mid­way through 2016 when the ref­er­en­dum on a Brexit ap­proaches. Presently, an­a­lysts are eye­ing a key 115 sup­port level, but if they yen re­v­erses course and the dol­lar ap­pre­ci­ates, it could be a per­fect buy­ing op­por­tu­nity for those go­ing long on the green­back.

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