Policy makers are seeking to assure the public that new Governor Haruhiko Kuroda's unprecedented stimulus will help meet the price goal, with the yen dropping about 11 percent since the previous forecast on Jan. 22. Kuroda said today that the central bank won't set a time limit for easing and will continue until it achieves sustainable inflation.
“It will be very challenging to meet this forecast, but it's not mission impossible,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official. “It's a mind game to some degree, based on raising inflation expectations.”
Eoin Treacy's view The ramifications of attempts to stoke Japanese inflation are likely to be wide ranging not least because foreign investors are being tempted back into the market following a long interval, albeit on a mostly currency hedged basis. The other side of that equation is that currency hedging is equally appealing for Japanese savers whose capital is being targeted as part of the government's reflationary initiatives.
During the financial crisis the Yen was the beneficiary of heavy inflows as investors crowded out of risk assets. This resulted in a sharp appreciation against commodity currencies in particular but also the Pound and Euro. Between 2008 and late last year, the Yen was particularly strong on a trade weighted basis. The Deutsche Bank Yen Trade Weighted Index held a progression of higher reaction lows until December when it broke lower and continues to extend its decline.
Such has been the speed with which the Yen has fallen against a large basket of currencies that is can be considered oversold by just about any measure. Against the US Dollar the ¥100 area represents a potential area of support at least in the short-term. However, a sustained move below ¥92.8 would be required to question medium-term scope for Dollar dominance.
Despite the short-term oversold condition evident on a number of Yen cross rates I thought it might be useful to consider currencies and government bond markets that might benefit from the Yen carry trade.
I looked at South Africa in this context following an email in yesterday's Comment of the Day. However the Australian, New Zealand, Mexican and Thai markets are also worthy of mention.
The Yen broke downwards from a more than two-year range against the Australian Dollar in December and has since fallen to test the 2007 lows in the region of 95¢. This region represents a potential area of support so some steadying cannot be ruled out. However a sustained move above $1.03 would be required to break the progression of lower rally highs and question medium-term scope for continued weakness. Australian 10-year government bond futures rallied last week to break a six-month progression of lower rally highs. Prices found support on Wednesday near 96.6 and a sustained move below that level would be required to question current scope for a successful break above 96.8. Australian government bonds currently yield in the region of 3.25%.
The Yen also dropped down out of a more than two–year range against the New Zealand Dollar and continues to extend its decline. New Zealand 10-year yields failed to sustain a breakout from a yearlong range in February and have since fallen back to test the lows. A clear upward dynamic would now be required to check potential for a successful downward break.
The Yen has held a progression of lower rally highs against the Mexican Peso since June 2012 and while oversold in the short-term, a break in this sequence would be required to question medium-term scope for continued weakness. Mexican 10-year yields continue to trend lower and hit a new low this week near 4.7%. A sustained move above the 200-day MA, currently near 5.3%, would be required to begin to question the consistency of yield compression.
The Yen has encountered resistance in the region of 40 Baht on a number of occasions since 1996, most recently from June 2010. It continues to fall towards the lower side of the long-term range and a sustained move above THB32 would be required to question the consistency of the decline. Thai 10-year yields have been ranging in a triangular fashion since 2008 and have fallen over the last month to test the progression of rising lows. A clear upward dynamic would be required to question potential for further compression.
The correlation of the Yen's weakness against the US Dollar and the pick-up in the pace of the MLP sector's appreciation is also worthy of mention. The JPMorgan Alerian MLP ETF yields 4.5% and ranged with an upward bias, mostly below $40, until January when it broke upwards. A sustained move below that level would now be required to question medium-term scope for continued upside.