The Japanese yen continued its downfall during January. The new Japanese government did not back down on elections promises. Officials continued talking down the yen directly and said that the yen is only “correcting” from excessive strength.
The pressure on the Bank of Japan continued and was somewhat fruitful: the BOJ announced more QE, set an inflation target of 2% and presented a program of open ended bond buying.
* This article is part of the February 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.
However, the BOJ didn’t go all the way: the open ended program is only planned for 2014, and serves merely as a threat. In addition, the central bank’s own targets for the medium term are for lower inflation levels than 2%.
So, the level of determination in the BOJ is still much lower than in the government. The current governor of the BOJ, Masaaki Shirakawa, is set to retire in March and Prime Minister Shinzo Abe already announced he would be looking for a candidate with similar views to his.
Abe must receive the approval of Japan’s upper house of parliament for the candidate. The upper house is controlled by the opposition, at least for now. Elections will be held in July and the post needs to be filled in the meantime.
During February, the search and negotiations for a new government will be in full speed, and we can expect a new governor to be named during the month. The profile of this person will certainly impact the yen.
Currency wars become dangerous
In the meantime, Japan’s peers are showing some discontent about its efforts to weaken the yen: comments about currencies from the two top figures in the euro-zone: German Chancellor Angela Merkel and French President Françios Hollande.
Towards the G-20 summit in mid-February, Japan might wish to lower the tone, and even express worries about the weakness of the yen. This would be politically wise: also the Chinese Yuan strengthens toward key international meetings, as a way to appease critics that blame it for currency manipulation.
An extremely weak yen could genuinely be dangerous for Japan: the nation depends on imports of fossil fuels for energy, and high prices could weigh on the country. In addition, Japanese bond yields remain well bid so far: the weaker yen and the rise in Tokyo’s stock market hasn’t deterred investors, mostly domestic, from Japanese bonds. These JGBs could lose their shine if the yen were to plunge too fast.
The next significant political milestone for USD/JPY is 95 – at the current pace of appreciation, this target could be easily reached during February. Also the round number of 130 for EUR/JPY could draw attention.
Ideally, Japan would like to see the yen weaken a bit more, but to see a more gradual process – one that would not anger its peers and would allow importers and exporters to adjust themselves.
During February, we could see some more fine balancing, especially in EUR/JPY that leaped over 1000 pips in January.
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