JPY Analysis – 28th of April

Jarratt Davis

Special Consultant to the FPA
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Although a bearish currency fundamentally, given the extreme easing measures in place and prospect of further QE and more negative rates, the yen has the ability to appreciate due to risk-off sentiment. The recent disappointment for markets by the BoJ has given new found strength to the yen and current sentiment remains bullish. The yen may appreciate further in coming weeks, however its appreciation 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: Q4 (annualised)

Revised GDP: -1.1% Expected: -1.5%

Next Release (Q1 Preliminary): May 17

The yen 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 with USDJPY falling 300 pips in the immediate aftermath and 400 pips in the following 12 hours to test the 108 handle.

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.

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