JPY Analysis – 24th of May

Jarratt Davis

Special Consultant to the FPA
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Although JPY is a bearish currency fundamentally, given the extreme easing measures in place and prospect of further QE and more negative rates, JPY has the ability to appreciate due to risk-off sentiment. Any appreciation however should be capped heading into the June meeting, given the chance of easing again.

JPY Analysis

Interest Rate

Overnight Target Rate: 0.10%

Last Change: December 19, 2008 (0.30%)

Bank reserves above threshold: -0.10%

Expected Future Change: Potential expansion of QQE and widening of negative rates

Quantitative Easing: ¥80 trillion (~$660 billion) per annum

Next Rate Decision: June 16

Inflation

Inflation Target: 2%

Period: Year ending April 30

Tokyo CPI (All Items): -0.4% Prior: -0.1%

Tokyo CPI (Ex-Food & Energy): 0.6% Prior: 0.6%

Period: Year ending March 31

Nationwide CPI (All Items): -0.3% Prior: 0.3%

Nationwide CPI (Ex-Food & Energy): 0.7% Prior: 0.8%

BoJ Core: 1.1% Prior: 1.1%

Next Release: May 26

Employment

Period: March

Unemployment Rate: 3.2% Prior: 3.3%

Next Release: May 30

Growth

Period: Q1 (annualised)

Preliminary GDP: 1.7% Expected: 0.3%

Next Release (Q1 Final): June 8

JPY saw massive appreciation on April 28 when the BoJ left monetary policy unchanged. 23 out of 41 analysts incorrectly predicted an announcement of further easing, for which the market had partially positioned for, with USDJPY having rallied over 400 pips in the preceding 2 weeks. The news saw yen pairs drop dramatically with USDJPY falling over 500 pips to below 106.00 in the days that followed. Most yen pairs have however began paring most of this move as the BoJ are still expected to ease further with inflation still far below target. USDJPY is once again above 110.00 aided by positive USD sentiment.

At the April 28 meeting, the BoJ reduced their forecasts for both inflation and GDP for this year and next year. Further easing remains a possibility at the next BoJ meeting, especially if CPI excluding food & energy moves lower.

The BoJ’s own measure of inflation excluding food and energy remained at 1.1% y/y for March, unchanged from February and January. This is the most important indicator to assess the prospect of further easing; a fall below 1% will push the BoJ to act, as will further yen strength, which hinders inflation.

Tokyo CPI excluding food & energy for April remained at 0.6% y/y, same as prior. Nationwide CPI excluding food and energy for March dipped to 0.7% y/y, from prior of 0.8%. Thus far, inflation in Japan has shown no signs of moving higher.

Preliminary GDP for Q1 printed much higher than expected at 1.7% y/y versus expectations of 0.3%, and at 0.4% q/q versus expectations of 0.1%. Japan’s economic expansion in Q1, and significant improvement on last year’s Q4 contraction was the result of a rebound in consumer demand and stronger government spending.

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