Fx flash how sustainable is the jpy decline 13 july 2016

FX Flash

Group Economics Macro & Financial Markets Research

13 July 2016

How sustainable is the JPY decline?

Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 JPY testing 105 on hopes of helicopter money  Kuroda: no intention to employ helicopter money  Is the JPY decline sustainable?

JPY testing 105 on hopes of helicopter money Since Japan Prime Minister Abe’s ruling coalition won a sweeping victory in the Upper House last weekend, the Japanese yen has been sold off aggressively from 100.50 to 105. Market expectations that more powerful fiscal and monetary stimulus will be implemented sooner than later have weighed on the yen. The Sankei reported that Prime Minister Abe adviser Honda had recently advised that it is time to introduce helicopter money. Former Fed chairman Bernanke was reported to have said that there are various monetary easing instruments that the BoJ could still implement during their closed meeting earlier this week. Hamada, a close adviser of Abe also stated that Bernanke may have discussed helicopter money with Japanese officials when he met policy makers in the Ministry of Finance and BoJ governor Kuroda.

Kuroda: no intention to employ helicopter money Earlier this year in April, BoJ governor Kuroda had said that they have no intention to employ helicopter money, anything like that as it would blur the division of responsibilities between parliament, which is responsible for fiscal policy, and the central bank which sets monetary policy. Kuroda added that unless the existing legal framework changes, helicopter money is not possible. It is also worth noting that Japan had embarked on similar measures back in 1930s which resulted in sky high inflation. Hence there could be some reservations to implement such bold measures. As highlighted by our Chief economist Han De Jong earlier this year in March, a material deterioration of economic conditions and inflation prospects is required before helicopter money would be seriously considered in Europe. For more details, please refer to Macro Weekly – Next stop helicopter money? We think that this applies similarly to Japan.

Insights.abnamro.nl/en

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FX Flash - How sustainable is the JPY decline? - 13 July 2016

Is the JPY decline sustainable?

Real yields differentials between the US and Japan have recovered and is weighing on the yen against the US dollar. Nevertheless, we are fearful that the recent sharp decline in the yen could be another market phenomenon of ‘buy the rumour and sell the fact’. As liquidation of speculative long yen positions push the yen lower, we expect hedging activities (from unhedged foreign investment positions) to increase.

This is likely to cap weakness in the yen. In our view, a breakout of 106-108 resistance zone is crucial.

USD/JPY; Real interest rate differentials

Elevated long yen futures positions

Level

%

Number of contracts

125

0.60

150000

120

0.40

100000

115

0.20

110

0.00

105

-0.20

-100000

100 Jan-16

-0.40

-150000 Jan-11

50000 0

Mar-16

May-16

Jul-16

-50000

Apr-12

Jul-13

Oct-14

USD/JPY (lhs)

CFTC non-commerical long JPY futures position

10y US-JP inflation expectations adjusted yield spread % (rhs)

CFTC non-commerical net JPY futures position

Source: Bloomberg

Source: CFTC

Jan-16

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FX Flash - How sustainable is the JPY decline? - 13 July 2016

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