Name: Japan and stimulus — stick or twist? I FT Markets
Uploaded: 2016-07-29T03:27:44.000Z
Duration: 3 min 50 s
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The yen is more than 1% stronger because traders are less convinced that the Bank of Japan

will on Friday unveil a big package of physical and monetary stimulus.

Adverbs of manner

One bank that has been consistently predicting the BOJ would actually not do anything this week is MUFG.

And with us from MUFG is Derek Halpenny, its European Head of global market's research.

Derek, the problem for the BOJ is whether they've got the tools to do the kind of thing they need to do.

Well I think the timing is hugely important now, as you can see, in terms of the scale of quantitative easing and the buying of JJBs,

it's been huge, and therefore, they need to be very very careful in terms of

the timing of when they announce and the extension of that.

So our view is that they're going to remain very very cautious,

perhaps what they want to see is more steps taken on the Abenomic side of policy in Japan.

And therefore, they may wait until we have further details of physical stimulus,

and hopefully, some other reform measures in regard to the third arrow of Abenomics and then perhaps later in the year,

maybe at the October meeting, that would be a more opportune time to extend quantitative easing.

Dollar-yen, it's been strengthening recently, and now it's again, today, weakening.

Let's have a look at our next chart which illustrates this.

Well, certainly, now if you look at the nominal interest rate spreads that's the very quick way in which dollar-yen tends to respond.

So the US data has been strengthening, and perhaps tomorrow when we get the FED statements,

there will be an upgrade on the economy after the labor market has picked up.

2-year yields have pretty much in the United States reversed the Brexit drop.

So that's one element. The next element, which our third chart shows, it's actually more from the Japan side, isn't it?

Yeah, we're wary of putting too much emphasis on the nominal interest rate differential,

and really, as you can see, during Abenomics, it wasn't really nominal yield spreads that drove dollar-yen higher.

It was real interest rate spreads, because Abenomics lifted inflation expectations in Japan.

The problem since the beginning of this year is that Abenomics has been unravelling, inflation expectations have plunged,

and actually, on a five-year five-year inflation swap basis, turned negative earlier this month.

So real yields have been rising in Japan,

and therefore, that has helped to lift the Japanese yen.

And that stronger Japanese yen, as our final chart shows, is actually creating a big current account surplus, isn't it?

Yeah, indeed, like in terms of what... obviously if you have a surplus of this size,

the exporting of capital on the financial account,

is even more important to try and weaken your currency.

And if you have rising real yields domestically, that's creating problems for encouraging both households and corporates

Or, what's been happening is the investment income on assets abroad, more of that money is being converted

back into Japanese yen, and that's helping to lift the yen.

And just finally, Derek, I mean you say there might be an action by the BOJ, say, in October,

Well we still feel that perhaps even by then the action might not be aggressive enough,

and we're looking at the influences that I've just pointed out, as keeping the yen on a stronger footing

so we could be at levels around a hundred or even below by the time we get to the end of the year.

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Japan and stimulus — stick or twist? I FT Markets

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