JPY: Good news? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that there has been some good news flowing from the Japan economy this year as in the first quarter of 2017, Japan managed to notch up a fifth consecutive quarter of growth. 

Key Quotes

“The pace of expansion measured 2.2% q/q saar, which was above the market consensus of 1.7% and also well above Japan’s long run growth potential of around 0.7%.  The better data suggests that Japan must be making progress in removing spare capacity from the economy which should put the BoJ a little closer to achieving its 2% inflation potential.  In reality, however, this target is still a very long way off.”

“The risk that Japanese consumption will remain lacklustre underpins the importance of the external sector to the overall economy.  Net exports contributed a solid 0.6 percentage points to the Q1 expansion and the latest release of April trade data showed a 7.5% y/y rise in exports.  Although this was weaker than expected, it is still the fifth consecutive month of expansion.”

“In spite of the better tone of Japanese economic data this year, BoJ governor Kuroda has recently stressed that the weak tone of wages and inflation means that it is too soon for the central bank to exit from its extraordinary monetary policy.  Even so, in view of the current tightening bias of the Federal Reserve, a debate has emerged in the market as to when the BoJ will consider a withdrawal of stimulus.”

“In theory, the loose BoJ policy and the contrasting tightening bias of the Fed should push USD/JPY higher.  This dynamic was responsible for the surge in the value of USD/JPY in the final weeks of last year.  In turn, this helped to bolster Japanese exports in Q1 and was welcoming by the Japanese stock market.  Since the start of the year, however, USD/JPY has drifted lower.  Disappointment over Trump’s reflationary promises partly explain the firmer tone of the JPY.  Safe haven flows, however, are also responsible.”

“Concerns over N. Korea’s nuclear programme and tensions in the S. China Sea have both prompted support for the JPY this year.  As we have frequently pointed out, due to the JPY’s role as a safe haven, its value often has more to do with international events rather than domestic fundamentals.  By definition a shock cannot be forecasted.  However, the high incidence of surprise political events this year suggests that more are likely in store.  For this reason we expect USD/JPY to hold below the Y115 this year.  Further dips below the Y110 levels cannot be ruled out if geopolitical tensions rise again, though we expect trade to be centred in the Y110 to 114 region in the coming months.”